Take the money and run: making profits by paying borrowers to stay home

Coco, Giuseppe ; De Meza, David ; Pignataro, Giuseppe ; Reito, Francesco (2013) Take the money and run: making profits by paying borrowers to stay home. Bologna: Dipartimento di Scienze economiche DSE, p. 18. DOI 10.6092/unibo/amsacta/3707. In: Quaderni - Working Paper DSE (861). ISSN 2282-6483.
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Abstract

Can a bank increase its profit by subsidizing inactivity? This paper suggests this may occur, due to the presence of hidden information, in a monopolistic credit market. Rather than offering credit in a pooling contract, a monopolist bank can sort borrowers through an appropriate subsidy to inactivity. Under some conditions, sorting may avoid the collapse of the market and increases the welfare of everybody. The bank increases its profits, good borrowers benefit from lower interest rates and bad potential borrowers from the subsidy. The subsidy policy however implies a cross subsidy between contracts and this is possible only under monopoly.

Abstract
Document type
Monograph (Working Paper)
Creators
CreatorsAffiliationORCID
Coco, Giuseppe
De Meza, David
Pignataro, Giuseppe
Reito, Francesco
Keywords
Credit market, Screening, Subsidy
Subjects
ISSN
2282-6483
DOI
Deposit date
21 Jun 2013 10:56
Last modified
24 Feb 2016 09:27
URI

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