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Profiting from the poor in competitive lending markets with adverse selection

Author

Listed:
  • Bernhardt, Dan

    (University of Illinois and University of Warwick)

  • Koufopoulos, Kostas

    (University of York)

  • Trigilia, Giulio

    (University of Rochester)

Abstract

We provide theoretical foundations for positive lender profits in competitive credit markets with asymmetric information, where potential borrowers have scarce collateralizable assets. Strikingly, when some borrowers have negative net present value projects, an equilibrium always exists in which lenders make positive profits, despite their lack of `soft' information and free entry of competitors. We then establish that greater access to collateral for borrowers reduces lender profits, and we relate our findings to the empirical evidence on micro-credit, payday lending, and, more broadly, retail and small business financing. JEL Classification: D82 ; D86

Suggested Citation

  • Bernhardt, Dan & Koufopoulos, Kostas & Trigilia, Giulio, 2021. "Profiting from the poor in competitive lending markets with adverse selection," The Warwick Economics Research Paper Series (TWERPS) 1328, University of Warwick, Department of Economics.
    • Handle: RePEc:wrk:warwec:1328
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    References listed on IDEAS

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    More about this item

    Keywords

    Adverse selection ; positive profits ; collateral ; free entry ; market breakdown ; credit markets;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law

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