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Redistribution, Collateral Subsidy and Screening

Author

Listed:
  • Francesco Reito

Abstract

Under adverse selection, redlining of borrowers may occur when their wealth is not sufficient to reach the collateral needed by creditors to separate types. In this paper, potential entrepreneurs can join in a peer group and voluntarily decide to collect and redistribute their endowments. If the fund is not enough to give everyone the amount of collateral that allows for a separation of types, this paper suggests that the government should intervene with a subsidy on the collateral. This policy produces a unique separating equilibrium and is the optimal intervention in the setup analyzed.

Suggested Citation

  • Francesco Reito, 2011. "Redistribution, Collateral Subsidy and Screening," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 67(1), pages 8-26, March.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201103)67:1>8:rcsas__8:rcsas
    DOI: 10.1628/001522108X574164
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    More about this item

    Keywords

    mutual credit; redistribution; screening; policy intervention;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs

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