Take the money and run: making profits by paying borrowers to stay home

Giuseppe Coco, David de Meza, Giuseppe Pignataro and F. Reito

Working Papers from Dipartimento Scienze Economiche, Universita' di Bologna

Abstract: Can a bank increase its profit by subsidizing inactivity? This paper suggests this may occur, due to the presence of hidden information, in a monopolistic credit market. Rather than offering credit in a pooling contract, a monopolist bank can sort borrowers through an appropriate subsidy to inactivity. Under some conditions, sorting may avoid the collapse of the market and increases the welfare of everybody. The bank increases its profits, good borrowers benefit from lower interest rates and bad potential borrowers from the subsidy. The subsidy policy however implies a cross subsidy between contracts and this is possible only under monopoly.

JEL-codes: D60 D82 H71 (search for similar items in EconPapers)
Date: 2013-01
New Economics Papers: this item is included in nep-ban and nep-cta
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Related works:
Working Paper: Take the Money and Run: Making Profi ts by Paying Borrowers to Stay Home (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:bol:bodewp:wp861

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