Abstract
A well-known principle holds that equity provides better risk sharing opportunities than debt, but that there are greater enforcement problems associated with equity. Income contingent loans (ICL) represent an efficient (low transactions cost) way of implementing equity contracts for human capital.1 The amount the individual repays is dependent on his or her income. While it seems natural to link ICL with investments that increase the value of human capital — most notably education — there is no necessary reason to limit it to such investments.
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References
Chapman, B. (2010) ‘Policy Design Issues for Risk Management: Adverse Selection and Moral Hazard in the Context of Income Contingent Loans’, in G. Marston, J. Moss and J. Quiggin (eds) Risk, Welfare and Work (Carlton, Australia: Melbourne University Press) pp. 233–252.
Chapman, B and B. Hunter (2009) ‘Exploring creative applications of income contingent loans’, Australian Journal of Labour Economics, Vol. 12, No. 2, pp. 133–144.
Stiglitz, J.E. (1998) ‘Pareto Efficient Taxation and Expenditure Policies, With Applications to the Taxation of Capital, Public Investment, and Externalities’, presented at conference in honor of Agnar Sandmo, Bergen, January 1998.
Stiglitz, J.E. and J. Yun (2013) ‘Optimal Provision of Loans and Insurance Against Unemployment From A Lifetime Perspective’, National Bureau of Economic Research Working Paper No. w19064.
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© 2014 International Economics Association
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Stiglitz, J.E. (2014). Remarks on Income Contingent Loans: How Effective can they be at Mitigating Risk?. In: Chapman, B., Higgins, T., Stiglitz, J.E. (eds) Income Contingent Loans. International Economic Association Series. Palgrave Macmillan, London. https://doi.org/10.1057/9781137413208_3
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DOI: https://doi.org/10.1057/9781137413208_3
Publisher Name: Palgrave Macmillan, London
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