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'Irresponsible Lending' With A Better Informed Lender

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  • Roman Inderst

Abstract

We present a simple model of personal finance in which an incumbent lender has an information advantage "vis-à-vis" both potential competitors and households. In order to extract more consumer surplus, a lender with sufficient market power may engage in 'irresponsible' lending, approving credit even if this is knowingly against a household's best interest. Unless rival lenders are equally well informed, competition may reduce welfare. This holds, in particular, if less informed rivals can free ride on the incumbent's superior screening ability. Copyright © The Author(s). Journal compilation © Royal Economic Society 2008.

Suggested Citation

  • Roman Inderst, 2008. "'Irresponsible Lending' With A Better Informed Lender," Economic Journal, Royal Economic Society, vol. 118(532), pages 1499-1519, October.
    • Handle: RePEc:ecj:econjl:v:118:y:2008:i:532:p:1499-1519
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    2. Renaud Bourlès & Anastasia Cozarenco & Dominique Henriet & Xavier Joutard, 2022. "Business Training with a Better-Informed Lender: Theory and Evidence from Microcredit in France," Annals of Economics and Statistics, GENES, issue 148, pages 65-108.
    3. Peitz, Martin & Shin, Dongsoo, 2015. "Capital-labor distortions in project finance," Working Papers 15-01, University of Mannheim, Department of Economics.
    4. de Meza, David & Reito, Francesco, 2019. "Too Little Lending: A Problem of Symmetric Information," MPRA Paper 93700, University Library of Munich, Germany.
    5. Hyytinen, Ari & Putkuri, Hanna, 2012. "Household optimism and borrowing," Bank of Finland Research Discussion Papers 21/2012, Bank of Finland.
    6. Distefano, Rosaria & Di Fede, Gianfranco & Reito, Francesco, 2020. "Consumer credit under asymmetric information: The wrong types apply," Economics Letters, Elsevier, vol. 197(C).
    7. Hyytinen, Ari & Putkuri, Hanna, 2012. "Household optimism and borrowing," Research Discussion Papers 21/2012, Bank of Finland.
    8. Haucap, Justus & Heimeshoff, Ulrich & Uhde, André, 2010. "Zur Neuregulierung des Bankensektors nach der Finanzkrise: Bewertung der Reformvorhaben der EU aus ordnungspolitischer Sicht," DICE Ordnungspolitische Perspektiven 02, Heinrich Heine University Düsseldorf, Düsseldorf Institute for Competition Economics (DICE).
    9. Reinhard H. Schmidt, 2010. "Microfinance, Commercialization and Ethics," Poverty & Public Policy, John Wiley & Sons, vol. 2(1), pages 99-137, January.

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