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Consumer credit under asymmetric information: The wrong types apply

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  • Distefano, Rosaria
  • Di Fede, Gianfranco
  • Reito, Francesco

Abstract

We present a simple asymmetric information model of the consumer credit with perfectly competitive banks and many borrowers who wish to advance the purchase of an indivisible good. We show a credit rationing equilibrium is possible. Unlike business lending models, it is not just the volume of lending that is wrong but also who gets loans. A policy that targets the interest rate can increase social efficiency, but not achieve the first best.

Suggested Citation

  • Distefano, Rosaria & Di Fede, Gianfranco & Reito, Francesco, 2020. "Consumer credit under asymmetric information: The wrong types apply," Economics Letters, Elsevier, vol. 197(C).
    • Handle: RePEc:eee:ecolet:v:197:y:2020:i:c:s0165176520303736
    DOI: 10.1016/j.econlet.2020.109613
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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.
    2. Jonathan Zinman, 2014. "Consumer Credit: Too Much or Too Little (or Just Right)?," The Journal of Legal Studies, University of Chicago Press, vol. 43(S2), pages 209-237.
    3. Roman Inderst, 2008. "'Irresponsible Lending' With A Better Informed Lender," Economic Journal, Royal Economic Society, vol. 118(532), pages 1499-1519, October.
    4. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    5. Dwight M. Jaffee & Thomas Russell, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 651-666.
    6. de Meza, David & Webb, David, 2000. "Does credit rationing imply insufficient lending?," Journal of Public Economics, Elsevier, vol. 78(3), pages 215-234, November.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Consumer credit; Overlending; Credit rationing;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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