Small Business Economics

, Volume 41, Issue 1, pp 241–251

Unfair credit allocations

Article

DOI: 10.1007/s11187-012-9422-3

Cite this article as:
Coco, G. & Pignataro, G. Small Bus Econ (2013) 41: 241. doi:10.1007/s11187-012-9422-3

Abstract

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.

Keywords

Collateral Credit Cross-subsidization Decreasing absolute risk aversion Wealth 

JEL Classifications

D31 D82 G21 L26 

Copyright information

© Springer Science+Business Media, LLC. 2012

Authors and Affiliations

  1. 1.Dipartimento di Studi sullo StatoUniversità di FirenzeFirenzeItaly
  2. 2.Department of EconomicsUniversity of BolognaBolognaItaly

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