This article investigates the impact of credit allocation on heterogeneous wealth entrepre- neurs. We show that with decreasing risk aversion and unobservable wealth, poorer borrowers exert more effort. As a consequence of endogenous adverse selection, they are either excluded from the market or necessarily subsidize richer borrowers in a pooling equilibrium resulting in a paradoxical and inequitable redistribution. Alternatively, a less likely separating equilibrium may occur, in which poor types bear the entire weight of separation in the form of excess risk taking.

Unfair credit allocations

PIGNATARO, GIUSEPPE
2013

Abstract

This article investigates the impact of credit allocation on heterogeneous wealth entrepre- neurs. We show that with decreasing risk aversion and unobservable wealth, poorer borrowers exert more effort. As a consequence of endogenous adverse selection, they are either excluded from the market or necessarily subsidize richer borrowers in a pooling equilibrium resulting in a paradoxical and inequitable redistribution. Alternatively, a less likely separating equilibrium may occur, in which poor types bear the entire weight of separation in the form of excess risk taking.
2013
G.Coco; G. Pignataro
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/11585/129741
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