The aim of this paper is to understand the mechanism underlying access to credit. We focus on explaining two important aspects of rural credit markets in Thailand. First, moneylenders and other forms of informal financing coexist with formal lending institutions such as government or commercial banks, and more recently, micro-lending institutions. Second, potential borrowers face sizeable transaction costs obtaining external credit. We develop a model that provides a unified view of these facts and whose tractability allows a structural estimation. The results show large disparities between access to formal and informal credit. While for some households the cost of accessing a formal institution can be as large as the average amount borrowed, the transaction costs of credit from informal sources are negligible for everyone. In addition, the data strongly reject the hypothesis that access to formal credit is uniform across households. In fact, although proximity to a formal institution reduces the transaction cost, the importance of other measures suggest that informational asymmetries also play a role.
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