Abstract

In this project, we seek to understand the behavior of credit markets using stable matching theory and identify potential ways it can be improved or altered. We will discuss the current conditions of credit market in developing countries and analyze issues that prevent government institutions (such as development banks) from reaching out to poor borrowers. We will then introduce the marriage model and the assignment game model to provide a theoretical framework that describes the behavior of credit market. By using a framework built upon matching theory, we are able to establish a method for governments to ensure that market outcomes are stable, optimal for the borrowers, contain the lowest competitive price of loans, and encourage truth telling from the borrowers. Finally, we will extend our framework to study the impact of additional credit entering the market as a result of vertical linkage between formal and informal lenders.