Inequality of opportunity in the credit market

Giuseppe Coco and Giuseppe Pignataro

No 2010/5, DEMQ Working Paper Series from University of Catania, Department of Economics and Quantitative Methods

Abstract: Credit market imperfections can prevent the poor from making pro table 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 de ne equality of opportunity as the equal possibility of getting credit for a given aversion to e¤ort. We rst establish that, due to larger cross subsidization in high collateral classes of borrowers, richer individuals are more likely to get credit for a given aversion to e¤ort. Our second result is that Inequality of Opportunity is associated with an ine¢ cient allocation of resources among classes of borrowers. The marginal borrower in classes that post more collateral exerts less e¤ort 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 e¢ ciency reasons, which rarely occurs in practice.

Keywords: equality of opportunity; credit; moral hazard; cross subsidization; collateral. (search for similar items in EconPapers)
JEL-codes: D63 D80 H80 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2010-01-19
New Economics Papers: this item is included in nep-ban and nep-cta
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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