The social cost of playing by the rules in the credit market

Rosaria Distefano

MPRA Paper from University Library of Munich, Germany

Abstract: We present a model of the credit market under imperfect information, with a lender and many would-be entrepreneurs who need external funding for their projects. Some borrowers may have the incentive to divert part of the loan received to other, illegal or non-contractible, uses. We first show that the equilibrium is more likely to be efficient when there is a high proportion of potential diverters. Another result is that, if diversion output is included in the social well-being function, equilibrium welfare can be higher than under symmetric information. When there is inefficiency, a regulatory intervention can be welfare improving but, the cost and desirability of the policy depend on whether the proceeds from diversion are classified as a contribution to social welfare or not.

Keywords: loan diversion; entrepreneurial financing; imperfect information; policy intervention. (search for similar items in EconPapers)
JEL-codes: D82 E44 E50 (search for similar items in EconPapers)
Date: 2022-02-04
New Economics Papers: this item is included in nep-ent
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