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Credit Markets with Ethical Banks and Motivated Borrowers

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  • Barigozzi, Francesca

    ()
    (Associazione Italiana per la Cultura della Cooperazione e del Non Profit)

  • Tedeschi, Piero

    ()
    (Associazione Italiana per la Cultura della Cooperazione e del Non Profit)

Abstract

This paper investigates banks’ corporate social responsibility. Two different competitive credit markets do exist: one for standard projects and one for ethical ones. Ethical projects have also a social profitability, but a lower (positive) expected revenue with respect to standard ones. Ethical projects are financed by ethical banks and undertaken by motivated borrowers. These borrowers obtain additional benefit (a social responsibility premium) from accomplishing ethical projects when trading with ethical banks. If the expected profitability of ethical project is sufficiently close to that of standard ones and/or the social responsibility premium of motivated borrowers is sufficiently high, the market for ethical projects is active and the credit market is fully segmented. This result holds true irrespective of the information structure: only moral hazard on the borrower side, moral hazard and screening on the borrower side, moral hazard on the borrower side and screening on the lender side. The optimal contract in our set-up is always a debt contract. However, its precise form and welfare properties depend on the information structure.

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Bibliographic Info

Paper provided by Associazione Italiana per la Cultura della Cooperazione e del Non Profit in its series AICCON Working Papers with number 99-2012.

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Length: 33 pages
Date of creation: 16 Jan 2012
Date of revision:
Handle: RePEc:ris:aiccon:2012_099

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Keywords: corporate social responsibility; ethical banks; motivated borrowers; microfinance;

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  1. Besley, T. & Coate, S., 1991. "Group Lending, Repayment Incentives And Social Collateral," Papers 152, Princeton, Woodrow Wilson School - Development Studies.
  2. Jean Tirole & Roland Bénabou, 2010. "Individual and Corporate Social Responsibility," Working Papers 2010.23, Fondazione Eni Enrico Mattei.
  3. Michael Kosfeld & Ferdinand A. von Siemens, 2009. "Worker Self-Selection and the Profits from Cooperation," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 573-582, 04-05.
  4. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
  5. Tim Besley & Maitreesh Ghatak, 2005. "Competition and incentives with motivated agents," LSE Research Online Documents on Economics 928, London School of Economics and Political Science, LSE Library.
  6. M. Rabin, 2001. "Incorporating Fairness into Game Theory and Economics," Levine's Working Paper Archive 511, David K. Levine.
  7. Leland, Hayne E & Pyle, David H, 1977. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Journal of Finance, American Finance Association, vol. 32(2), pages 371-87, May.
  8. Maskin, Eric & Tirole, Jean, 1992. "The Principal-Agent Relationship with an Informed Principal, II: Common Values," Econometrica, Econometric Society, vol. 60(1), pages 1-42, January.
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Cited by:
  1. Simon Cornée & Ariane Szafarz, 2012. "Vive la Différence: Social Banks and Reciprocity in the Credit Market," Working Papers CEB 12-029, ULB -- Universite Libre de Bruxelles.

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