Faculty of Economics and Business Administration Publications Database

Irresponsible Lending` with a Better Informed Lender

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.