Take the Money and Run: Making Profi ts by Paying Borrowers to Stay Home
Can a bank increase its profi t by subsidizing inactivity? This paper suggests this may occur, due to the presence of hidden information, in a monopolistic credit market. Rather than offering credit in a pooling contract, a monopolist bank can sort borrowers through an appropriate subsidy to inactivity. Under some conditions, sorting may avoid the collapse of the market and increases the welfare of everybody. The bank increases its profi ts, good borrowers bene fit from lower interest rates and bad potential borrowers from the subsidy. The subsidy policy however implies a cross subsidy between contracts and this is possible only under monopoly.
|Date of creation:||2012|
|Contact details of provider:|| Postal: Via delle Pandette 9 50127 - Firenze - Italy|
Phone: +39 055 2759582
Web page: http://www.disei.unifi.it/
More information through EDIRC
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.:
- 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.
- Coco, Giuseppe, 2000.
" On the Use of Collateral,"
Journal of Economic Surveys,
Wiley Blackwell, vol. 14(2), pages 191-214, April.
- Coco, G., 1998. "On the Use of Collateral," Discussion Papers 9805, Exeter University, Department of Economics.
- Beck, Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2006. "Bank concentration, competition, and crises: First results," Journal of Banking & Finance, Elsevier, vol. 30(5), pages 1581-1603, May.
- de Meza, David & Webb, David, 2000. "Does credit rationing imply insufficient lending?," Journal of Public Economics, Elsevier, vol. 78(3), pages 215-234, November.
- George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
- Gruner, Hans Peter, 2003. "Redistribution as a selection device," Journal of Economic Theory, Elsevier, vol. 108(2), pages 194-216, February.
- Innes, Robert, 1991. "Investment and government intervention in credit markets when there is asymmetric information," Journal of Public Economics, Elsevier, vol. 46(3), pages 347-381, December. Full references (including those not matched with items on IDEAS)
When requesting a correction, please mention this item's handle: RePEc:frz:wpaper:wp2012_27.rdf. 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: (Giorgio Ricchiuti)
If references are entirely missing, you can add them using this form.