Lender Penalty for Environmental Damage and the Equilibrium Cost of Capital
AbstractIn a model of the lending relationship incorporating both adverse selection and moral hazard, the author shows that increasing the liability of lenders for environmental damage done by their borrowers has a qualitatively ambiguous impact upon interest rates. This calls into question the assertion of financial community representatives that such reform will necessarily drive up interest rates and have adverse macroeconomic consequences. If it is this fear that is preventing reform, then that reluctance may, in the case of many classes of pollutant, be misplaced. The implications of such reform for credit-rationing are also explored. Copyright 1996 by The London School of Economics and Political Science.
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Bibliographic InfoArticle provided by London School of Economics and Political Science in its journal Economica.
Volume (Year): 63 (1996)
Issue (Month): 250 (May)
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