Advanced Search
MyIDEAS: Login

Loans, Insurance and Failures in the Credit Market for Students

Contents:

Author Info

  • Elena Del Rey
  • Bertrand Verheyden

Abstract

Whereas public student loans are often income contingent, private banks typically offer pure loans, or don't offer loans at all. In order to provide a rationale for these observations, we present a model with perfectly competitive banks and risk averse students who have private information on their ability to learn. We show that the combination of ex-post moral hazard and adverse selection produces credit market rationing when default penalties are low. Intermediate levels of default penalties can result in the existence of an equilibrium that pools together ability types. However, pooling contracts are not insuring at equilibrium, which implies a second type of credit market failure. Finally, if default penalties are large enough, equilibrium contracts provide less able students with insurance against the eventuality of a bad outcome, just in the income contingent loan fashion. The model is also used to explain other stylized facts, such as the positive impact of returns to education and interest rate subsidies on the development of the student loan market. Also, it explains why, unlike banks, governments oer income contingent loans.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://research.barcelonagse.eu/tmp/working_papers/359.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Barcelona Graduate School of Economics in its series Working Papers with number 359.

as in new window
Length:
Date of creation: Aug 2008
Date of revision:
Handle: RePEc:bge:wpaper:359

Contact details of provider:
Postal: Ramon Trias Fargas, 25-27, 08005 Barcelona
Phone: +34 93 542-1222
Fax: +34 93 542-1223
Email:
Web page: http://www.barcelonagse.eu
More information through EDIRC

Related research

Keywords: ex-post moral hazard; adverse selection; income contingent loans;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Chen, Hung-ju, 2005. "Educational systems, growth and income distribution: a quantitative study," Journal of Development Economics, Elsevier, vol. 76(2), pages 325-353, April.
  2. Kehoe, Timothy J & Levine, David K, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Wiley Blackwell, vol. 60(4), pages 865-88, October.
  3. 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.
  4. Lance J. Lochner & Alexander Monge-Naranjo, 2010. "The Nature of Credit Constraints and Human Capital," University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers 20101, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
  5. Bruce Chapman, 2005. "Income Contingent Loans for Higher Education: International Reform," CEPR Discussion Papers 491, Centre for Economic Policy Research, Research School of Economics, Australian National University.
  6. David, DE LA CROIX, 2004. "Education and Growth with Endogenous Debt Constraints," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2004020, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
  7. Bas Jacobs & Sweder J.G. van Wijnbergen, 2005. "Capital Market Failure, Adverse Selection and Equity Financing of Higher Education," Tinbergen Institute Discussion Papers 05-037/3, Tinbergen Institute.
  8. Canton, Erik & Blom, Andreas, 2004. "Can student loans improve accessibility to higher education and student performance? An impact study of the case of SOFES, Mexico," Policy Research Working Paper Series 3425, The World Bank.
  9. Bruce Chapman & David Greenaway, 2006. "Learning to Live with Loans? International Policy Transfer and the Funding of Higher Education," The World Economy, Wiley Blackwell, vol. 29(8), pages 1057-1075, 08.
  10. Zeira, Joseph, 1991. "Credit Rationing in an Open Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(4), pages 959-72, November.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bge:wpaper:359. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bruno Guallar).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.