‘Irresponsible Lending’ with a Better Informed Lender

Roman Inderst

Economic Journal, 2008, vol. 118, issue 532, 1499-1519

Abstract: We present a simple model of personal finance in which an incumbent lender has an information advantage vis‐à‐vis both potential competitors and households. In order to extract more consumer surplus, a lender with sufficient market power may engage in ‘irresponsible’ lending, approving credit even if this is knowingly against a household's best interest. Unless rival lenders are equally well informed, competition may reduce welfare. This holds, in particular, if less informed rivals can free ride on the incumbent's superior screening ability.

Date: 2008
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https://doi.org/10.1111/j.1468-0297.2008.02179.x

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