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Credit Markets with Ethical Banks and Motivated Borrowers

  • F. Barigozzi
  • P. Tedeschi

This paper investigates banks’ corporate social responsibility. The credit market is composed of two sectors: one for standard and one for ethical projects. Since ethical banks are committed to investing in ethical projects, standard and ethical banks compete in the market for ethical projects. The latter have also a social profitability, but a lower expected revenue with respect to standard ones. If their expected revenue is not too low, ethical projects are undertaken by motivated borrowers. The latter obtain a benefit (a social responsibility premium) from accomplishing ethical projects in general and a premium for successful interaction when trading with ethical banks in the case the project is successful. If the expected profitability of ethical projects is sufficiently close to that of standard ones and/or the premium for successful interaction of motivated borrowers is sufficiently high, ethical banks are active, both sectors of the credit market exist and the whole 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. 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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Paper provided by Dipartimento Scienze Economiche, Universita' di Bologna in its series Working Papers with number wp786.

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Date of creation: Sep 2011
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Handle: RePEc:bol:bodewp:wp786
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  1. Matthew Rabin., 1992. "Incorporating Fairness into Game Theory and Economics," Economics Working Papers 92-199, University of California at Berkeley.
  2. Besley, Timothy J. & Ghatak, Maitreesh, 2004. "Competition and Incentives with Motivated Agents," CEPR Discussion Papers 4641, C.E.P.R. Discussion Papers.
  3. Kosfeld, Michael & von Siemens, Ferdinand, 2008. "Worker Self-Selection and the Profits from Cooperation," IZA Discussion Papers 3881, Institute for the Study of Labor (IZA).
  4. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
  5. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers 41, University of California at Berkeley.
  6. Jean Tirole & Roland Bénabou, 2010. "Individual and Corporate Social Responsibility," Working Papers 2010.23, Fondazione Eni Enrico Mattei.
  7. 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.
  8. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
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