Profiting from the poor in competitive lending markets with adverse selection

Dan Bernhardt, Kostas Koufopoulos and Giulio Trigilia
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Kostas Koufopoulos: University of York
Giulio Trigilia: University of Rochester

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: We provide theoretical foundations for positive lender profits in competitive credit markets with asymmetric information, where potential borrowers have scarce collateralizable assets. Strikingly, when some borrowers have negative net present value projects, an equilibrium always exists in which lenders make positive profits, despite their lack of `soft' information and free entry of competitors. We then establish that greater access to collateral for borrowers reduces lender profits, and we relate our findings to the empirical evidence on micro-credit, payday lending, and, more broadly, retail and small business financing. JEL Classification: D82 ; D86

Keywords: Adverse selection; positive profits; collateral; free entry; market breakdown; credit markets (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-com, nep-ent and nep-mfd
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:1328

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