XXVI Edition

14-15-16 December 2017"

Serving the (Un)Deserving? The Allocation of Credit in Markets with Asymmetrically Informed Lenders

D'Amato Marcello, University of Salerno, CSEF and CELPE
Di Pietro Christian, University of Salerno
Sorge Marco Maria, University of Salerno, University of Goettingen and CSEF

Historical examinations of credit markets in advanced economies have provided ample evidence on the coexistence of a variety of banking models, some of which specialize in information-intensive business practices. This paper studies the operation of markets in which asymmetrically informed lenders compete for heterogeneous quality investment projects in the presence of market imperfections. We explore how the business model underlying informed lending - profit maximization (e.g. for profit relational lenders) vs. inter-member surplus redistribution (e.g. credit cooperatives) - shapes relative comparative advantages and affects market efficiency. Two findings stand out. First, the inefficiency of the equilibrium resulting in credit markets in which both types of lenders are operative always proves ameliorated, relative to a world in which uninformed banks only populate the banking landscape. Second, market interaction between asymmetrically informed lenders can generate multiple equilibria. Hence, small changes in the business conditions or other fundamentals can cause large shifts in the allocation of credit leading to either highly selective markets (with reduced inefficiency) or ones which rather endorse credit provision to undeserved entrepreneurs (hence exacerbating market failures).

Area: Banking

Keywords: Credit markets, Asymmetric information, Universal banks, Credit cooperatives

Paper file

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