Loans, Insurance and Failures in the Credit Market for Students
In the education literature, it is generally acknowledged that both credit and insurance for students are rationed. In order to provide a rationale for these observations, we present a model with perfectly competitive banks and risk averse students who have private information on their ability to learn and can decide to default on debt. We show that the combination of ex-post moral hazard and adverse selection produces credit market rationing when default penalties are low. When default penalties increase, the level of student risk aversion proves crucial in determining the market outcome. If risk aversion is low, banks offer non-insuring pooling contracts at equilibrium that may result in overinvestment in education. If student risk aversion is high, high ability students are separated and student loan contracts involve a limited amount of insurance.
|Date of creation:||2011|
|Contact details of provider:|| Postal: Poschingerstrasse 5, 81679 Munich|
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo-group.de
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Bas Jacobs & Sweder J. G. van Wijnbergen, 2007.
"Capital-Market Failure, Adverse Selection, and Equity Financing of Higher Education,"
FinanzArchiv: Public Finance Analysis,
Mohr Siebeck, Tübingen, vol. 63(1), pages 1-32, March.
- Bas Jacobs & Sweder J.G. van Wijnbergen, 2005. "Capital Market Failure, Adverse Selection and Equity Financing of Higher Education," Tinbergen Institute Discussion Papers 05-037/3, Tinbergen Institute.
- David de Meza & David C. Webb, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 281-292.
- Lance J. Lochner & Alexander Monge-Naranjo, 2011.
"The Nature of Credit Constraints and Human Capital,"
American Economic Review,
American Economic Association, vol. 101(6), pages 2487-2529, October.
- Lance J. Lochner & Alexander Monge-Naranjo, 2008. "The Nature of Credit Constraints and Human Capital," NBER Working Papers 13912, National Bureau of Economic Research, Inc.
- Lance J. Lochner, 2009. "The Nature of Credit Constraints and Human Capital," 2009 Meeting Papers 745, Society for Economic Dynamics.
- Lance Lochner & Alexander Monge-Naranjo, 2010. "The Nature of Credit Constraints and Human Capital," Working Papers 2011-024, Human Capital and Economic Opportunity Working Group.
- Lance J. Lochner & Alexander Monge-Naranjo, 2010. "The Nature of Credit Constraints and Human Capital," University of Western Ontario, Centre for Human Capital and Productivity (CHCP) Working Papers 20101, University of Western Ontario, Centre for Human Capital and Productivity (CHCP).
- Bruce Chapman & David Greenaway, 2006. "Learning to Live with Loans? International Policy Transfer and the Funding of Higher Education," The World Economy, Wiley Blackwell, vol. 29(8), pages 1057-1075, August.
- David Croix & Philippe Michel, 2007.
"Education and growth with endogenous debt constraints,"
Springer;Society for the Advancement of Economic Theory (SAET), vol. 33(3), pages 509-530, December.
- DE LA CROIX, David & MICHEL, Philippe, "undated". "Education and growth with endogenous debt constraints," CORE Discussion Papers RP 1991, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- DE LA CROIX, David & MICHEL, Philippe, 2004. "Education and growth with endogenous debt constraints," CORE Discussion Papers 2004074, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- David, DE LA CROIX, 2004. "Education and Growth with Endogenous Debt Constraints," Discussion Papers (IRES - Institut de Recherches Economiques et Sociales) 2004020, Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES).
- Chapman, Bruce, 2006.
"Income Contingent Loans for Higher Education: International Reforms,"
Handbook of the Economics of Education,
- Bruce Chapman, 2005. "Income Contingent Loans for Higher Education: International Reform," CEPR Discussion Papers 491, Centre for Economic Policy Research, Research School of Economics, Australian National University.
- Canton, Erik & Blom, Andreas, 2004. "Can student loans improve accessibility to higher education and student performance? An impact study of the case of SOFES, Mexico," Policy Research Working Paper Series 3425, The World Bank.
- John Fender & Ping Wang, 2003.
"Educational Policy in a Credit Constrained Economy with Skill Heterogeneity,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(3), pages 939-964, August.
- John Fender & Ping Wang, 2001. "Educational Policy in a Credit Constrained Economy with Skill Heterogeneity," Vanderbilt University Department of Economics Working Papers 0133, Vanderbilt University Department of Economics.
- Timothy J. Kehoe & David K. Levine, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 865-888.
- Chen, Hung-ju, 2005.
"Educational systems, growth and income distribution: a quantitative study,"
Journal of Development Economics,
Elsevier, vol. 76(2), pages 325-353, April.
- Hung-ju Chen, 2003. "Educational Systems, Growth and Income Distribution: A Quantitative Study," Computing in Economics and Finance 2003 13, Society for Computational Economics.
- Zeira, Joseph, 1991. "Credit Rationing in an Open Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(4), pages 959-972, November.
When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_3410. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Klaus Wohlrabe)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.