Take the money and run: making profits by paying borrowers to stay home
AbstractCan a bank increase its profit by subsidizing inactivity? This paper suggests this may occur, due to the presence of hidden information, in a monopolistic credit market. Rather than offering credit in a pooling contract, a monopolist bank can sort borrowers through an appropriate subsidy to inactivity. Under some conditions, sorting may avoid the collapse of the market and increases the welfare of everybody. The bank increases its profits, good borrowers benefit from lower interest rates and bad potential borrowers from the subsidy. The subsidy policy however implies a cross subsidy between contracts and this is possible only under monopoly.
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Bibliographic InfoPaper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number wp861.
Date of creation: Jan 2013
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Other versions of this item:
- Giuseppe Coco & David De Meza & Giuseppe Pignataro & Francesco Reito, 2012. "Take the Money and Run: Making Profi ts by Paying Borrowers to Stay Home," Working Papers - Economics, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa wp2012_27.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
- D60 - Microeconomics - - Welfare Economics - - - General
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
This paper has been announced in the following NEP Reports:
- NEP-ALL-2013-01-19 (All new papers)
- NEP-BAN-2013-01-19 (Banking)
- NEP-CTA-2013-01-19 (Contract Theory & Applications)
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