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Inequality of Opportunity in the Credit Market

Author

Listed:
  • Giuseppe Coco

    (University of bari)

  • Giuseppe Pignataro

    (DEFAP, Catholic University of Milan, Milan, Italy)

Abstract
Credit market imperfections can prevent the poor from making profitable investments. Under asymmetric information observable features, such as wealth and collateral, play an important role in determining who gets credit, in violation of the Equality of Opportunity principle. We define equality of opportunity as the equal possibility of getting credit for a given aversion to effort. We first establish that, due to larger cross subsidization in high collateral classes of borrow- ers, richer individuals are more likely to get credit for a given aversion to effort. Our second result is that Inequality of Opportunity is associated with an inefficient allocation of resources among classes of borrowers. The marginal borrower in classes that post more collateral exerts less effort in equilibrium (and therefore produces lower aggregate surplus) than the marginal borrower in lower collateral classes. This suggests that public credit policies should be targeted at poorer classes of would be borrowers both for equity and efficiency reasons, which rarely occurs in practice.

Suggested Citation

  • Giuseppe Coco & Giuseppe Pignataro, 2010. "Inequality of Opportunity in the Credit Market," SERIES 0026, Dipartimento di Economia e Finanza - Università degli Studi di Bari "Aldo Moro", revised Jan 2010.
    • Handle: RePEc:bai:series:economia-series26
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    References listed on IDEAS

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    1. David de Meza & David C. Webb, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 281-292.
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    Cited by:

    1. G. Coco & G. Pignataro, 2012. "Wealth inequality, unequal opportunities and inefficient credit market," Working Papers wp851, Dipartimento Scienze Economiche, Universita' di Bologna.
    2. Giuseppe Coco & Giuseppe Pignataro, 2013. "Unfair credit allocations," Small Business Economics, Springer, vol. 41(1), pages 241-251, June.
    3. Mcknight, Abigail, 2019. "Understanding the relationship between poverty, inequality and growth: a review of existing evidence," LSE Research Online Documents on Economics 103458, London School of Economics and Political Science, LSE Library.
    4. Coco, G. & Pignataro, G., 2011. "Perverse cross-subsidization in the credit market," Working Papers 11/01, Department of Economics, City University London.
    5. Abigail McKnight, 2019. "Understanding the relationship between poverty, inequality and growth: a review of existing evidence," CASE Papers /216, Centre for Analysis of Social Exclusion, LSE.

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    More about this item

    Keywords

    equality of opportunity; credit; moral hazard; crosssubsidization; collateral;
    All these keywords.

    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • H8 - Public Economics - - Miscellaneous Issues

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