When to seek expert advice? A simple model of borrowers with limited liabilityRatul Das Chaudhury and Sukanta Bhattacharya Mathematical Social Sciences, 2023, vol. 125, issue C, 113-120 Abstract: We model the situation where a borrower can choose to acquire costly information about the outcome before implementing a risky project. The borrower is resource-constrained and faces a trade-off between incurring the cost of information or putting effort into the project. We provide novel insights about the type of project the borrower chooses and identify the conditions under which the borrower acquires information. We characterize the optimality conditions for the interest rate charged by a socially-motivated as well as a profit-motivated lender. We find that if the interest rate is high, the borrower is likely to choose riskier projects and acquire information about the outcome. If capital is moderately expensive for the lender, even the socially-motivated lender charges a higher interest and makes a positive profit. This provides an alternate explanation for the prevalence of high-interest rates in the rural credit market, despite the presence of socially-motivated lenders. Keywords: Information acquisition; Individual liability; Socially-motivated lender (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:matsoc:v:125:y:2023:i:c:p:113-120 DOI: 10.1016/j.mathsocsci.2023.05.001 Access Statistics for this article Mathematical Social Sciences is currently edited by J.-F. Laslier More articles in Mathematical Social Sciences from Elsevier |
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