Small Business Economics

, Volume 41, Issue 1, pp 241–251 | Cite as

Unfair credit allocations

  • Giuseppe Coco
  • Giuseppe Pignataro


This article investigates the impact of credit allocation on heterogeneous wealth entrepreneurs. We show that with decreasing risk aversion and unobservable wealth, poorer borrowers exert more effort. As a consequence of endogenous adverse selection, they are either excluded from the market or necessarily subsidize richer borrowers in a pooling equilibrium resulting in a paradoxical and inequitable redistribution. Alternatively, a less likely separating equilibrium may occur, in which poor types bear the entire weight of separation in the form of excess risk taking.


Collateral Credit Cross-subsidization Decreasing absolute risk aversion Wealth 

JEL Classifications

D31 D82 G21 L26 



We are indebted to David de Meza, Alberto Bennardo, Emma Carter, Daniel Kraus, Alireza Naghavi and Alberto Zazzaro for useful comments. The suggestions of the associate editor and an anonymous referee helped to improve considerably the paper. We are also grateful to the participants at the SIE conference (October, 2010), the Meeting of ECINEQ in Catania (July, 2011), the conference of the European Economics and Finance Society in London (June, 2011) and the European Economic Association Conference in Oslo (August, 2011). Responsibility for mistakes remains entirely ours. Giuseppe Coco gratefully acknowledges the financial support of the MIUR Prin Grant No. 2007RR7HCN.


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Copyright information

© Springer Science+Business Media, LLC. 2012

Authors and Affiliations

  1. 1.Dipartimento di Studi sullo StatoUniversità di FirenzeFirenzeItaly
  2. 2.Department of EconomicsUniversity of BolognaBolognaItaly

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