A mass of evidence suggests that aspiring entrepreneurs with low net worth or from disadvantaged social groups are excluded from capital markets. Asymmetric information potentially explains these findings, though whether aggregate lending is raised or lowered relative to the full information outcome is ambiguous. Whichever case occurs, subsidising credit may decrease efficiency. This is all the more true when, as the evidence suggests, potential entrepreneurs are prone to unrealistic optimism. Indeed, even though optimism may cause redlining and credit rationing and so lower lending, the case for policies to encourage lending is further undermined. Copyright Royal Economic Society 2002
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Volume (Year): 112 (2002)
Issue (Month): 477 (February)
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