The poor are twice cursed: Wealth inequality and inefficient credit market

Giuseppe Coco and Giuseppe Pignataro

Journal of Banking & Finance, 2014, vol. 49, issue C, 149-159

Abstract: This paper investigates the role of unobservable wealth differences on credit market equilibrium, given there is also asymmetric information concerning effort preferences and choices. In equilibrium, poor but able entrepreneurs may subsidise the rich and incompetent or be excluded. As a result, investment may exceed or fall short of the optimal level. Low inequality may deliver conditions for perfect screening and an efficient level of investment. The equilibrium with cross subsidisation is consistent with otherwise puzzling empirical observations.

Keywords: Wealth; Collateral; Effort; Cross-subsidisation; DARA (search for similar items in EconPapers)
JEL-codes: D31 D82 G21 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:49:y:2014:i:c:p:149-159

DOI: 10.1016/j.jbankfin.2014.09.002

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