Unfair credit allocations
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- Coco, G. & Pignataro, G. Small Bus Econ (2013) 41: 241. doi:10.1007/s11187-012-9422-3
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This article investigates the impact of credit allocation on heterogeneous wealth entrepreneurs. We show that with decreasing risk aversion and unobservable wealth, poorer borrowers exert more effort. As a consequence of endogenous adverse selection, they are either excluded from the market or necessarily subsidize richer borrowers in a pooling equilibrium resulting in a paradoxical and inequitable redistribution. Alternatively, a less likely separating equilibrium may occur, in which poor types bear the entire weight of separation in the form of excess risk taking.