Take the Money and Run: Making Profi ts by Paying Borrowers to Stay Home

Giuseppe Coco, David de Meza, Giuseppe Pignataro and Francesco Reito
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Francesco Reito: Università degli studi di Catania

Working Papers - Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: Can a bank increase its profi t by subsidizing inactivity? This paper suggests this may occur, due to the presence of hidden information, in a monopolistic credit market. Rather than offering credit in a pooling contract, a monopolist bank can sort borrowers through an appropriate subsidy to inactivity. Under some conditions, sorting may avoid the collapse of the market and increases the welfare of everybody. The bank increases its profi ts, good borrowers bene fit from lower interest rates and bad potential borrowers from the subsidy. The subsidy policy however implies a cross subsidy between contracts and this is possible only under monopoly.

Keywords: Credit market; Screening; Subsidy (search for similar items in EconPapers)
JEL-codes: D60 D82 H71 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2012
New Economics Papers: this item is included in nep-ban and nep-cta
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Related works:
Working Paper: Take the money and run: making profits by paying borrowers to stay home (2013)
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