IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/115326.html
   My bibliography  Save this paper

The social cost of playing by the rules in the credit market

Author

Listed:
  • Distefano, Rosaria

Abstract

We present a model of the credit market under imperfect information, with a lender and many would-be entrepreneurs who need external funding for their projects. Some borrowers may have the incentive to divert part of the loan received to other, illegal or non-contractible, uses. We first show that the equilibrium is more likely to be efficient when there is a high proportion of potential diverters. Another result is that, if diversion output is included in the social well-being function, equilibrium welfare can be higher than under symmetric information. When there is inefficiency, a regulatory intervention can be welfare improving but, the cost and desirability of the policy depend on whether the proceeds from diversion are classified as a contribution to social welfare or not.

Suggested Citation

  • Distefano, Rosaria, 2022. "The social cost of playing by the rules in the credit market," MPRA Paper 115326, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:115326
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/115326/1/MPRA_paper_115326.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Madestam, Andreas, 2014. "Informal finance: A theory of moneylenders," Journal of Development Economics, Elsevier, vol. 107(C), pages 157-174.
    2. Giuseppe Coco, 2000. "On the Use of Collateral," Journal of Economic Surveys, Wiley Blackwell, vol. 14(2), pages 191-214, April.
    3. Guha, Brishti & Chowdhury, Prabal Roy, 2013. "Micro-finance competition: Motivated micro-lenders, double-dipping and default," Journal of Development Economics, Elsevier, vol. 105(C), pages 86-102.
    4. Sergio Navajas & Jonathan Conning & Claudio Gonzalez-Vega, 2003. "Lending technologies, competition and consolidation in the market for microfinance in Bolivia," Journal of International Development, John Wiley & Sons, Ltd., vol. 15(6), pages 747-770.
    5. Abhijit Vinayak Banerjee, 2013. "Microcredit Under the Microscope: What Have We Learned in the Past Two Decades, and What Do We Need to Know?," Annual Review of Economics, Annual Reviews, vol. 5(1), pages 487-519, May.
    6. Lauermann, Stephan, 2012. "Asymmetric information in bilateral trade and in markets: An inversion result," Journal of Economic Theory, Elsevier, vol. 147(5), pages 1969-1997.
    7. Mike Burkart & Tore Ellingsen, 2004. "In-Kind Finance: A Theory of Trade Credit," American Economic Review, American Economic Association, vol. 94(3), pages 569-590, June.
    8. Oliver Hart & John Moore, 1998. "Default and Renegotiation: A Dynamic Model of Debt," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(1), pages 1-41.
    9. Allen N. Berger & Gregory F. Udell, 2002. "Small Business Credit Availability and Relationship Lending: The Importance of Bank Organisational Structure," Economic Journal, Royal Economic Society, vol. 112(477), pages 32-53, February.
    10. Xavier Gine & Jessica Goldberg & Dean Yang, 2012. "Credit Market Consequences of Improved Personal Identification: Field Experimental Evidence from Malawi," American Economic Review, American Economic Association, vol. 102(6), pages 2923-2954, October.
    11. Rafael La Porta & Florencio Lopez‐De‐Silanes & Andrei Shleifer & Robert Vishny, 2002. "Investor Protection and Corporate Valuation," Journal of Finance, American Finance Association, vol. 57(3), pages 1147-1170, June.
    12. Art Durnev & E. Han Kim, 2005. "To Steal or Not to Steal: Firm Attributes, Legal Environment, and Valuation," Journal of Finance, American Finance Association, vol. 60(3), pages 1461-1493, June.
    13. Hui‐wen Koo & Chen‐ying Huang & Kamhon Kan, 2012. "Interlinked Contracts: An Empirical Study," Economica, London School of Economics and Political Science, vol. 79(314), pages 350-377, April.
    14. Repullo, Rafael & Suarez, Javier, 2000. "Entrepreneurial moral hazard and bank monitoring: A model of the credit channel," European Economic Review, Elsevier, vol. 44(10), pages 1931-1950, December.
    15. Mitchell A. Petersen & Raghuram G. Rajan, 1995. "The Effect of Credit Market Competition on Lending Relationships," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(2), pages 407-443.
    16. Caserta, Maurizio & Monteleone, Simona & Reito, Francesco, 2018. "The trade-off between profitability and outreach in microfinance," Economic Modelling, Elsevier, vol. 72(C), pages 31-41.
    17. Enrico Minelli & Salvatore Modica, 2009. "Credit Market Failures and Policy," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 11(3), pages 363-382, June.
    18. Robert Cull & Asli Demirguç-Kunt & Jonathan Morduch, 2007. "Financial performance and outreach: a global analysis of leading microbanks," Economic Journal, Royal Economic Society, vol. 117(517), pages 107-133, February.
    19. J. D. Von Pischke & Dale W Adams, 1980. "Fungibility and the Design and Evaluation of Agricultural Credit Projects," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 62(4), pages 719-726.
    20. Bruce Wydick, 2001. "Group Lending under Dynamic Incentives as a Borrower Discipline Device," Review of Development Economics, Wiley Blackwell, vol. 5(3), pages 406-420, October.
    21. repec:bla:rdevec:v:5:y:2001:i:3:p:406-20 is not listed on IDEAS
    22. 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.
    23. Carole Howorth & Andrea Moro, 2012. "Trustworthiness and interest rates: an empirical study of Italian SMEs," Small Business Economics, Springer, vol. 39(1), pages 161-177, July.
    24. Arnoud W. A. Boot & Anjan V. Thakor, 2000. "Can Relationship Banking Survive Competition?," Journal of Finance, American Finance Association, vol. 55(2), pages 679-713, April.
    25. Ashim Kumar Kar & Ranjula Bali Swain, 2014. "Interest Rates and Financial Performance of Microfinance Institutions: Recent Global Evidence," The European Journal of Development Research, Palgrave Macmillan;European Association of Development Research and Training Institutes (EADI), vol. 26(1), pages 87-106, January.
    26. Beatriz Armendáriz & Ariane Szafarz, 2011. "On Mission Drift in Microfinance Institutions," World Scientific Book Chapters, in: Beatriz Armendáriz & Marc Labie (ed.), The Handbook Of Microfinance, chapter 16, pages 341-366, World Scientific Publishing Co. Pte. Ltd..
    27. Carter, Michael R., 1988. "Equilibrium credit rationing of small farm agriculture," Journal of Development Economics, Elsevier, vol. 28(1), pages 83-103, February.
    28. de Meza, David & Reito, Francesco & Reyniers, Diane, 2021. "Too much trade: A problem of adverse selection," MPRA Paper 107084, University Library of Munich, Germany.
    29. Timothy J. Besley & Konrad B. Burchardi & Maitreesh Ghatak, 2012. "Incentives and the De Soto Effect," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 127(1), pages 237-282.
    30. Beck, Thorsten & Demirguc-Kunt, Asli & Maksimovic, Vojislav, 2004. "Bank Competition and Access to Finance: International Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 627-648, June.
    31. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 84(3), pages 488-500.
    32. Supriya Garikipati, 2013. "Microcredit and Women's Empowerment: Have We Been Looking at the Wrong Indicators?," Oxford Development Studies, Taylor & Francis Journals, vol. 41(sup1), pages 53-75, August.
    33. Shneyerov, Artyom & Wong, Adam Chi Leung, 2011. "The role of private information in dynamic matching and bargaining: Can it be good for efficiency?," Economics Letters, Elsevier, vol. 112(1), pages 128-131, July.
    34. de Meza, David & Reito, Francesco & Reyniers, Diane, 2021. "Too much trade: The hidden problem of adverse selection," Journal of Public Economics, Elsevier, vol. 204(C).
    35. David de Meza & David C. Webb, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 281-292.
    36. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    37. Spiros Bougheas, 2004. "Internal vs External Financing of R&D," Small Business Economics, Springer, vol. 22(1), pages 11-17, February.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Rosaria Distefano, 2024. "Occupational choice and entrepreneurship: From necessity to opportunity," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 95(1), pages 225-247, March.
    2. Reto Wernli & Andreas Dietrich, 2022. "Only the brave: improving self-rationing efficiency among discouraged Swiss SMEs," Small Business Economics, Springer, vol. 59(3), pages 977-1003, October.
    3. Christian Haas & Karol Kempa, 2023. "Low-Carbon Investment and Credit Rationing," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 86(1), pages 109-145, October.
    4. Emilios Galariotis & Christophe Villa & Nurmukhammad Yusupov, 2011. "Recent Advances in Lending to the Poor with Asymmetric Information," Journal of Development Studies, Taylor & Francis Journals, vol. 47(9), pages 1371-1390, July.
    5. Lu, Haitian & Wang, Bo & Wang, Haizhi & Zhao, Tianyu, 2020. "Does social capital matter for peer-to-peer-lending? Empirical evidence," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    6. Berger, Allen N. & Udell, Gregory F., 2006. "A more complete conceptual framework for SME finance," Journal of Banking & Finance, Elsevier, vol. 30(11), pages 2945-2966, November.
    7. Shannon Mudd, 2013. "Bank Structure, Relationship Lending and Small Firm Access to Finance: A Cross-Country Investigation," Journal of Financial Services Research, Springer;Western Finance Association, vol. 44(2), pages 149-174, October.
    8. Backman, Mikaela, 2013. "Banks and New Firm Formation," Working Paper Series in Economics and Institutions of Innovation 301, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    9. Curtiss, Jarmila, 2012. "Determinants of Financial Capital Use: Review of theories and implications for rural businesses," Factor Markets Working Papers 123, Centre for European Policy Studies.
    10. Djedidi-Kooli, Salima, 2009. "L’accès au financement des PME en France : quel rôle joué par la structure du système bancaire ?," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/8354 edited by Etner, François.
    11. Song Zhang & Liang Han & Konstantinos Kallias & Antonios Kallias, 2021. "The value of in-person banking: evidence from U.S. small businesses," Review of Quantitative Finance and Accounting, Springer, vol. 57(4), pages 1393-1435, November.
    12. Gabriele Angori & David Aristei, 2020. "Heterogeneity and state dependence in firms’ access to credit: Microevidence from the euro area," SEEDS Working Papers 0220, SEEDS, Sustainability Environmental Economics and Dynamics Studies, revised Feb 2020.
    13. Neyer, Ulrike, 2004. "Asymmetric information in credit markets--implications for the transition in Eastern Germany," Economic Systems, Elsevier, vol. 28(1), pages 61-78, March.
    14. Francesco Cohen & Alessandro Fedele & Paolo M. Panteghini, 2016. "Corporate taxation and financial strategies under asymmetric information," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 33(1), pages 9-34, April.
    15. Conning, Jonathan & Udry, Christopher, 2007. "Rural Financial Markets in Developing Countries," Handbook of Agricultural Economics, in: Robert Evenson & Prabhu Pingali (ed.), Handbook of Agricultural Economics, edition 1, volume 3, chapter 56, pages 2857-2908, Elsevier.
    16. Hanna Hottenrott & Bettina Peters, 2012. "Innovative Capability and Financing Constraints for Innovation: More Money, More Innovation?," The Review of Economics and Statistics, MIT Press, vol. 94(4), pages 1126-1142, November.
    17. Coco, G. & Pignataro, G., 2011. "Perverse cross-subsidization in the credit market," Working Papers 11/01, Department of Economics, City University London.
    18. Benfratello, Luigi & Schiantarelli, Fabio & Sembenelli, Alessandro, 2008. "Banks and innovation: Microeconometric evidence on Italian firms," Journal of Financial Economics, Elsevier, vol. 90(2), pages 197-217, November.
    19. Ma, Qianli & Xu, Lei & Anwar, Sajid & Lu, Zenghua, 2023. "Banking competition and the use of shadow credit: Evidence from lending marketplaces," Global Finance Journal, Elsevier, vol. 58(C).
    20. Hans Gersbach & Harald Uhlig, 2007. "On the Coexistence of Banks and Markets," Scandinavian Journal of Economics, Wiley Blackwell, vol. 109(2), pages 225-243, June.

    More about this item

    Keywords

    loan diversion; entrepreneurial financing; imperfect information; policy intervention.;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:115326. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.