Informal Finance and Asymmetric Information: A theory Review

Abstract

Based on theories of financial inhibition and Transaction Cost Theories, along with the combination of behavior economics, this paper tries to discuss and analyze the nature of informal finance. In china, it is hard to finance for Mid-small business, informal finance has advantage to deal with the capital gap of Mid-small size business as a supplementary means of formal finance which are hard to overcome the problem of adverse selection and moral hazard induced by asymmetric information. we discussed the foundation for existing of informal finance and objective necessity. Based on perspective of asymmetric information, we tried to answer why informal finance still thrived vibrantly on the process of financial deepening.