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Inequality of Opportunity in the Credit Market

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  • Giuseppe Coco

    ()
    (University of bari)

  • Giuseppe Pignataro

    ()
    (DEFAP, Catholic University of Milan, Milan, Italy)

Abstract

Credit market imperfections can prevent the poor from making profitable 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 define equality of opportunity as the equal possibility of getting credit for a given aversion to effort. We first establish that, due to larger cross subsidization in high collateral classes of borrow- ers, richer individuals are more likely to get credit for a given aversion to effort. Our second result is that Inequality of Opportunity is associated with an inefficient allocation of resources among classes of borrowers. The marginal borrower in classes that post more collateral exerts less effort 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 efficiency reasons, which rarely occurs in practice.

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Bibliographic Info

Paper provided by Dipartimento di Scienze Economiche e Metodi Matematici - Università di Bari in its series series with number 0026.

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Length: 702
Date of creation: Jan 2010
Date of revision: Jan 2010
Handle: RePEc:bai:series:wp0026

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Keywords: equality of opportunity; credit; moral hazard; crosssubsidization; collateral;

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  1. Coco, Guiseppe, 1997. "Collateral, Heterogeneity in Risk Attitude and the Credit Market Equilibrium," Discussion Papers 9702, Exeter University, Department of Economics.
  2. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September.
  3. Jimenez, Gabriel & Salas, Vicente & Saurina, Jesus, 2006. "Determinants of collateral," Journal of Financial Economics, Elsevier, vol. 81(2), pages 255-281, August.
  4. Morduch, Jonathan, 1999. "Between the State and the Market: Can Informal Insurance Patch the Safety Net?," World Bank Research Observer, World Bank Group, vol. 14(2), pages 187-207, August.
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  7. de Meza, David & Webb, David, 1999. "Wealth, Enterprise and Credit Policy," Economic Journal, Royal Economic Society, vol. 109(455), pages 153-63, April.
  8. Coco, Giuseppe, 2000. " On the Use of Collateral," Journal of Economic Surveys, Wiley Blackwell, vol. 14(2), pages 191-214, April.
  9. Wette, Hildegard C, 1983. "Collateral in Credit Rationing in Markets with Imperfect Information: Note," American Economic Review, American Economic Association, vol. 73(3), pages 442-45, June.
  10. Besley, T., 1992. "How Do Market Failures Justify Interventions in Rural Credit Markets?," Papers 162, Princeton, Woodrow Wilson School - Development Studies.
  11. Caterina Calsamiglia, 2009. "Decentralizing Equality Of Opportunity," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(1), pages 273-290, 02.
  12. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 281-92, May.
  13. Riley, John G, 1987. "Credit Rationing: A Further Remark [Credit Rationing in Markets with Imperfect Information] [Incentives Effects of Terminations: Applications to the Credit and Labor Markets]," American Economic Review, American Economic Association, vol. 77(1), pages 224-27, March.
  14. Joseph Stiglitz, 1998. "Distinguished Lecture on Economics in Government: The Private Uses of Public Interests: Incentives and Institutions," Journal of Economic Perspectives, American Economic Association, vol. 12(2), pages 3-22, Spring.
  15. David de Meza, 2002. "Overlending?," Economic Journal, Royal Economic Society, vol. 112(477), pages F17-F31, February.
  16. David De Meza & David C. Webb, 2006. "Credit Rationing: Something's Gotta Give," Economica, London School of Economics and Political Science, vol. 73(292), pages 563-578, November.
  17. de Meza, David & Webb, David, 2000. "Does credit rationing imply insufficient lending?," Journal of Public Economics, Elsevier, vol. 78(3), pages 215-234, November.
  18. Roemer, J.E., 1992. "A Pragmatic Theory of Responsibility for the Egalitarian Planner," Papers 391, California Davis - Institute of Governmental Affairs.
  19. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  20. Black, Jane & de Meza, David, 1994. "The nature of credit-market failure," Economics Letters, Elsevier, vol. 46(3), pages 243-249, November.
  21. Stiglitz, Joseph E & Weiss, Andrew, 1992. "Asymmetric Information in Credit Markets and Its Implications for Macro-economics," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 694-724, October.
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Cited by:
  1. Coco, G. & Pignataro, G., 2011. "Perverse cross-subsidization in the credit market," Working Papers 11/01, Department of Economics, City University London.
  2. G. Coco & G. Pignataro, 2012. "Wealth inequality, unequal opportunities and inefficient credit market," Working Papers wp851, Dipartimento Scienze Economiche, Universita' di Bologna.

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