Wealth inequality, unequal opportunities and inefficient credit market

Giuseppe Coco and Giuseppe Pignataro

Working Papers from Dipartimento Scienze Economiche, Universita' di Bologna

Abstract: This paper investigates the impact of heterogeneous wealth on credit allocation from an egalitarian opportunity and an efficiency point of view. Under asymmetric information on both wealth and the responsibility variable there is no trade-off between equality and efficiency, actually wealth inequality delivers both inequality of opportunity and inefficiency. Due to decreasing absolute risk aversion, poor entrepreneurs, other things equal, realize better projects. This notwithstanding, due to the bidimensional hidden information, they may be rationed out or obtain a loan only at the cost of cross subsidizing bad projects realized by rich entrepreneurs. In the first case inefficiency arises in the form of insufficient investment, in the second in the form of inefficient projects being realized. An egalitarian redistribution of endowments may lead to perfect screening, no inefficiencies in the allocation of credit and equality of opportunity.

JEL-codes: D31 D82 G21 (search for similar items in EconPapers)
Date: 2012-10
New Economics Papers: this item is included in nep-cta, nep-ent and nep-ppm
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bol:bodewp:wp851

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