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Inequality of opportunity in the credit market

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  • Coco, Giuseppe

    ()
    (Department of Economics, University of Bari)

  • Pignataro, Giuseppe

    ()
    (Department of Economics, University of Bologna)

Abstract

Credit market imperfections can prevent the poor from making pro table 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 de ne equality of opportunity as the equal possibility of getting credit for a given aversion to e¤ort. We rst establish that, due to larger cross subsidization in high collateral classes of borrowers, richer individuals are more likely to get credit for a given aversion to e¤ort. Our second result is that Inequality of Opportunity is associated with an ine¢ cient allocation of resources among classes of borrowers. The marginal borrower in classes that post more collateral exerts less e¤ort 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 e¢ ciency reasons, which rarely occurs in practice.

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Bibliographic Info

Paper provided by University of Catania, Department of Economics and Quantitative Methods in its series DEMQ Working Paper Series with number 2010/5.

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Length: 23 pages
Date of creation: 19 Jan 2010
Date of revision:
Handle: RePEc:ris:demqwp:2010_005

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Keywords: equality of opportunity; credit; moral hazard; cross subsidization; collateral.;

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  1. 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.
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  17. 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.
  18. Besley, Timothy, 1994. "How Do Market Failures Justify Interventions in Rural Credit Markets?," World Bank Research Observer, World Bank Group, vol. 9(1), pages 27-47, January.
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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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