Research On Theoretical Model And Realistic Choice Of Private Lending’s Policy Regulation

For quiet a long time, because of lacking corresponding，the folk finance mostlyoperates in the form of "out of the system" controlment in our country. Thus, the greatlymalignant development of folk finance will pose a great threat to financial security.Nevertheless, the current situation that pushing strict suppression against the folkfinance is not conducive to play the role of promoting financial deep and economicdevelopment. To a large extent the force to the long-term private lending led it to theillegal edge, unavoidably, the action contains a large number of financial risks. For thecase of guiding private finance to develop orderly and benignly, how to regulate it hasbecome a realistic problem to be urgently solved in the contemporary.The analysis of policy regulation to the folk finance starts with private lendings’two major economic characters which are possessed by folk finance in our country: therelative lack of demand elasticity and the high cost of law enforcement duringregulation. Secondly, the paper will explore the mechanism of the elasticity of demandand the cost of enforcement. Then, use the control measure to illegal goods for reference,the paper builds a policy regulation model for a private loan market. On this basis, thepaper tends to analyze the efficiency of two regulation means that governmentimplements. In this paper, based on the assumption that the government regulationmakes the maximization of social welfare as the decision objective and goal, meanwhile,taking the execution cost, demand elasticity, supply elasticity of loan and otherimportant factors into account, using the method of cost and efficiency comparison, thework analyzes the effect of two regulation measures of private lending activities: toprohibit with illegal ban and to legitimize with tax collection. Finally, based on thetheoretical model analysis and combining the current situation of financial reform inWenzhou, the paper explores the government regulation policy and realistic choice tofolk finance.The model and research show that: because of the lack of formal financial, thedemand of folk lending is inelastic as a commodity. Therefore, strengthened efforts ofgovernment to enforce private lending will bring huge social cost. In addition, when thedemand or supply elasticity is small, especially both of them are petty, the regulationcost to legitimize folk finance with tax collection will be much lower than to prohibit private lending with illegal ban, and the former means is more efficient than the latter incut borrowing loan amount and promote social welfare. As a conclusion, when demandof folk capital is relatively inelastic, it is not suitable for government to take directmeasures to control and enforce, to legitimize and collect tax will be a more appropriatemeans.According to the policy proposals and conclusion analysis based on the theoreticalmodel, the government policy guidance to folk finance includes three aspects: to givefolk finance reasonable and legal recognition; to tax to the main body who participatedin folk finance activities; to take supportive and auxiliary measures to guarantee the taxcollection. In reality, government has set up a platform for folk finance. As anearthshaking trial, the financial comprehensive reform in Wenzhou tends to regulateprivate lending through establishing a folk loan registration service center. Theregulation to folk finance takes an important step forward canonical development duringthe meaningful movement in Wenzhou.