Small Business Economics

, Volume 41, Issue 1, pp 241–251 | Cite as

Unfair credit allocations

Article

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 

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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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