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The poor are twice cursed: Wealth inequality and inefficient credit market

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  • Coco, Giuseppe
  • Pignataro, Giuseppe

Abstract

This paper investigates the role of unobservable wealth differences on credit market equilibrium, given there is also asymmetric information concerning effort preferences and choices. In equilibrium, poor but able entrepreneurs may subsidise the rich and incompetent or be excluded. As a result, investment may exceed or fall short of the optimal level. Low inequality may deliver conditions for perfect screening and an efficient level of investment. The equilibrium with cross subsidisation is consistent with otherwise puzzling empirical observations.

Suggested Citation

  • Coco, Giuseppe & Pignataro, Giuseppe, 2014. "The poor are twice cursed: Wealth inequality and inefficient credit market," Journal of Banking & Finance, Elsevier, vol. 49(C), pages 149-159.
    • Handle: RePEc:eee:jbfina:v:49:y:2014:i:c:p:149-159
    DOI: 10.1016/j.jbankfin.2014.09.002
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    3. Bowden, Roger J. & Posch, Peter N. & Ullmann, Daniel, 2018. "Income distribution in troubled times: Disadvantage and dispersion dynamics in Europe 2005–2013," Finance Research Letters, Elsevier, vol. 25(C), pages 36-40.

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    More about this item

    Keywords

    Wealth; Collateral; Effort; Cross-subsidisation; DARA;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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