Unfair credit allocations

Giuseppe Coco and Giuseppe Pignataro

Small Business Economics, 2013, vol. 41, issue 1, 251 pages

Abstract: This article investigates the impact of credit allocation on heterogeneous wealth entrepreneurs. We show that with decreasing risk aversion and unobservable wealth, poorer borrowers exert more effort. As a consequence of endogenous adverse selection, they are either excluded from the market or necessarily subsidize richer borrowers in a pooling equilibrium resulting in a paradoxical and inequitable redistribution. Alternatively, a less likely separating equilibrium may occur, in which poor types bear the entire weight of separation in the form of excess risk taking. Copyright Springer Science+Business Media, LLC. 2013

Keywords: Collateral; Credit; Cross-subsidization; Decreasing absolute risk aversion; Wealth; D31; D82; G21; L26 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:kap:sbusec:v:41:y:2013:i:1:p:241-251

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DOI: 10.1007/s11187-012-9422-3

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