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Credit Markets with Ethical Banks and Motivated Borrowers

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  • Francesca Barigozzi
  • Piero Tedeschi

Abstract

We investigate the corporate social responsibility of banks. Lenders offer loans to standard and motivated borrowers who undertake either standard or ethical projects. Standard banks have no restriction on the types of projects for which they can provide a loan. Ethical banks, instead, commit to financing only ethical projects, which have social profitability but lower expected revenues. Motivated borrowers are keen to invest in ethical projects and to deal with ethical banks. When they are active, ethical banks increase social welfare because the matching of ethical lenders with motivated borrowers reduces the frictions caused by the agency issue.

Suggested Citation

  • Francesca Barigozzi & Piero Tedeschi, 2015. "Credit Markets with Ethical Banks and Motivated Borrowers," Review of Finance, European Finance Association, vol. 19(3), pages 1281-1313.
  • Handle: RePEc:oup:revfin:v:19:y:2015:i:3:p:1281-1313.
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    File URL: http://hdl.handle.net/10.1093/rof/rfu030
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    References listed on IDEAS

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    1. Roland Benabou & Jean Tirole, 2010. "Individual and Corporate Social Responsibility," Economica, London School of Economics and Political Science, vol. 77(305), pages 1-19, January.
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    3. Leire San-Jose & Jose Retolaza & Jorge Gutierrez-Goiria, 2011. "Are Ethical Banks Different? A Comparative Analysis Using the Radical Affinity Index," Journal of Business Ethics, Springer, vol. 100(1), pages 151-173, April.
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    Cited by:

    1. Simon Cornée & Ariane Szafarz, 2014. "Vive la Différence: Social Banks and Reciprocity in the Credit Market," Post-Print CEB, ULB -- Universite Libre de Bruxelles, vol. 125(3), pages 361-380.
    2. Simon Cornée & Panu Kalmi & Ariane Szafarz, 2016. "Selectivity and Transparency in Social Banking: Evidence from Europe," Journal of Economic Issues, Taylor & Francis Journals, vol. 50(2), pages 494-502, April.
    3. Simon Cornée & Marc Jegers & Ariane Szafarz, 2018. "A Theory of Social Finance," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 2018-02, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.

    More about this item

    JEL classification:

    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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