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Credit Markets with Ethical Banks and Motivated Borrowers

Francesca Barigozzi and Piero Tedeschi ()

No 99-2012, AICCON Working Papers from Associazione Italiana per la Cultura della Cooperazione e del Non Profit

Abstract: This paper investigates banks’ corporate social responsibility. Two different competitive credit markets do exist: one for standard projects and one for ethical ones. Ethical projects have also a social profitability, but a lower (positive) expected revenue with respect to standard ones. Ethical projects are financed by ethical banks and undertaken by motivated borrowers. These borrowers obtain additional benefit (a social responsibility premium) from accomplishing ethical projects when trading with ethical banks. If the expected profitability of ethical project is sufficiently close to that of standard ones and/or the social responsibility premium of motivated borrowers is sufficiently high, the market for ethical projects is active and the credit market is fully segmented. This result holds true irrespective of the information structure: only moral hazard on the borrower side, moral hazard and screening on the borrower side, moral hazard on the borrower side and screening on the lender side. The optimal contract in our set-up is always a debt contract. However, its precise form and welfare properties depend on the information structure.

Keywords: corporate social responsibility; ethical banks; motivated borrowers; microfinance (search for similar items in EconPapers)
JEL-codes: D86 G21 G30 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban, nep-cta and nep-mfd
Date: 2012-01-16
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Working Paper: Credit Markets with Ethical Banks and Motivated Borrowers (2011) Downloads
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