Faculty of Economics and Business Administration Publications Database

Irresponsible Lending` with a Better Informed Lender

Selected
Authors:
Source:
Volume: 118
Number: 532
Pages: 1499 - 1519
Month: October
ISSN-Print: 0013-0133
Link External Source: Online Version
Year: 2008
Abstract: We present a simple model of personal finance in which an incumbent lender has an information advantage vis-à-vis both potential competitors and households. In order to extract more consumer surplus, a lender with sufficient market power may engage in ‘irresponsible’ lending, approving credit even if this is knowingly against a household''s best interest. Unless rival lenders are equally well informed, competition may reduce welfare. This holds, in particular, if less informed rivals can free ride on the incumbent''s superior screening ability.
back