I thank two anonymous referees and, in particular, the editor, Leonardo Felli, for very helpful comments. A previous version of this article was circulated under the title ‘Consumer Lending when Lenders are More Sophisticated Than Households’. I also thank seminar participants at the Bank of England, the European University Institute and Lancaster University.
‘Irresponsible Lending’ with a Better Informed Lender*
Article first published online: 20 SEP 2008
© The Author(s). Journal compilation © Royal Economic Society 2008
The Economic Journal
Volume 118, Issue 532, pages 1499–1519, October 2008
How to Cite
Inderst, R. (2008), ‘Irresponsible Lending’ with a Better Informed Lender. The Economic Journal, 118: 1499–1519. doi: 10.1111/j.1468-0297.2008.02179.x
- Issue published online: 20 SEP 2008
- Article first published online: 20 SEP 2008
- Submitted: 26 May 2006 Accepted: 22 February 2008
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.