The poor are twice cursed: Wealth inequality and inefficient credit market |
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Institution: | 1. Department of Economics and Finance, University of Rome Tor Vergata, Rome, Italy;2. CEIS, University of Rome Tor Vergata, Rome, Italy;3. RCEA-Rimini, Rome, Italy;4. International Fund for Agricultural Developement (IFAD), Rome, Italy |
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Abstract: | This paper investigates the role of unobservable wealth differences on credit market equilibrium, given there is also asymmetric information concerning effort preferences and choices. In equilibrium, poor but able entrepreneurs may subsidise the rich and incompetent or be excluded. As a result, investment may exceed or fall short of the optimal level. Low inequality may deliver conditions for perfect screening and an efficient level of investment. The equilibrium with cross subsidisation is consistent with otherwise puzzling empirical observations. |
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Keywords: | Wealth Collateral Effort Cross-subsidisation DARA |
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