Inequality of Opportunity in the Credit Market

Giuseppe Coco and Giuseppe Pignataro

No 26, SERIES from Dipartimento di Economia e Finanza - Università degli Studi di Bari "Aldo Moro"

Abstract: Credit market imperfections can prevent the poor from making profitable investments. Under asymmetric information observable features, such as wealth and collateral, play an important role in determining who gets credit, in violation of the Equality of Opportunity principle. We define equality of opportunity as the equal possibility of getting credit for a given aversion to effort. We first establish that, due to larger cross subsidization in high collateral classes of borrow- ers, richer individuals are more likely to get credit for a given aversion to effort. Our second result is that Inequality of Opportunity is associated with an inefficient allocation of resources among classes of borrowers. The marginal borrower in classes that post more collateral exerts less effort in equilibrium (and therefore produces lower aggregate surplus) than the marginal borrower in lower collateral classes. This suggests that public credit policies should be targeted at poorer classes of would be borrowers both for equity and efficiency reasons, which rarely occurs in practice.

Keywords: equality of opportunity; credit; moral hazard; crosssubsidization; collateral (search for similar items in EconPapers)
JEL-codes: D63 D8 H8 (search for similar items in EconPapers)
Pages: 702
Date: 2010-01, Revised 2010-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Inequality of opportunity in the credit market (2010)
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