Inequality of Opportunity in the Credit Market
AbstractCredit 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 InfoPaper provided by Dipartimento di Scienze Economiche e Metodi Matematici - Università di Bari in its series series with number 0026.
Date of creation: Jan 2010
Date of revision: Jan 2010
equality of opportunity; credit; moral hazard; crosssubsidization; collateral;
Other versions of this item:
- D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- H8 - Public Economics - - Miscellaneous Issues
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