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Mutual Loan-Guarantee Societies in Monopolistic Credit Markets with Adverse Selection ∗ (2009)
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BibTeX
@MISC{Busetta09mutualloan-guarantee,
author = {Giovanni Busetta and Università Di Messina and Alberto Zazzaro and Giovanni Busetta and Alberto Zazzaro},
title = {Mutual Loan-Guarantee Societies in Monopolistic Credit Markets with Adverse Selection ∗},
year = {2009}
}
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Abstract
In many countries, Mutual Loan-Guarantee Societies (MLGSs) are assuming ever-increasing importance for small business lending. In this paper we provide a theory to rationalise the raison d’être of MLGSs. The basic intuition is that the foundation for MLGSs lies in the inefficiencies created by adverse selection, when borrowers do not have enough collateralisable wealth to satisfy collateral requirements and induce self-selecting contracts. In this setting, we view MLGSs as a wealth-pooling mechanism that allows otherwise inefficiently rationed bor-rowers to obtain credit. We focus on the case of large, complex urban economies where potential entrepreneurs are numerous and possess no more information about each other than do banks. Despite our extreme assumption on information availability, we show that MLGSs can be characterized by assortative matching in which only safe borrowers have an incentive to join the mutual society. JEL Classification: D82, G21
Keyphrases
adverse selection mutual loan-guarantee society monopolistic credit market extreme assumption assortative matching raison tre potential entrepreneur wealth-pooling mechanism small business lending collateral requirement complex urban economy ever-increasing importance safe borrower collateralisable wealth many country jel classification self-selecting contract information availability mutual society basic intuition
