Francesco Reito

UNPRODUCTIVE INVESTMENT AND RENT EXTRACTION

This paper proposes a simple case of moral hazard in the credit market. A potential firm–entrepreneur needs outside financing to start up one potentially productive project. This agent has some initial illiquid endowment and is assumed to choose the amount of collateral to secure the financial debt. The model shows that, in the case of a monopolistic moneylender, only the minimum part of the endowment is offered as collateral and so invested in the productive sector. This occurs despite the fact that the loan received and, as a consequence, the final product will be the lowest possible. With perfectly competitive banks, instead, it is shown that it is possible to reach the first‐best outcome.

Take the Money and Run: Making Profits by Paying Borrowers to Stay Home

Can a bank increase its profit by subsidizing inactivity? This paper suggests this may occur, due to the presence of hidden information, in a monopolistic credit market. Rather than offering credit in a pooling contract, a monopolist bank can sort borrowers through an appropriate subsidy to inactivity. Under some conditions, sorting may avoid the collapse of the market and increases the welfare of everybody. The bank increases its profits, good borrowers benefit from lower interest rates and bad potential borrowers from the subsidy. The subsidy policy however implies a cross subsidy between contracts and this is possible only under monopoly.

Is it better to be mixed in group lending

This paper shows that, in a group-lending environment characterized by positive assortative matching, a microfinance institution can achieve a Pareto improvement by promoting negative matching among borrowers. Some new implications are: i) borrowers may be better off under mixed groups; ii) a heterogeneous group lending equilibrium is possible even when individual or homogeneous group equilibria do not exist.

Keeping up by robbing the Joneses

ABSTRACT In this article, we find evidence of a ‘keeping up with the Joneses’ effect in the relationship between inequality and crime in Italy. We use data on minor and major crimes in the 20 Italian regions in the years 2004–2015 and show that for higher (lower) income levels, inequality leads individuals to commit major (minor) crimes to try to keep up with richer people.

Are Bad Firms Beneficial to Growth

In this paper we analyse a case of adverse selection in the credit market to show that, in the presence of a monopolistic bank, bad firms can be beneficial to accumulation and growth. Two main implications are drawn: first, even if classical diminishing returns on technology are ruled out, growth declines over time. Second, any attempt to make banks more capable of discriminating between bad and good firms will resolve itself into a restraint to growth.

Moral Hazard and Labour-Managed Firms in Italy after the Law N. 142/2001

Instead of focusing on the difference between a labour-managed (LMF) and a profit maximizing firm (PMF) in terms of final out-come and occupation, this paper considers the actual possibility for a firm to be financed from outside. A simple case of moral hazard in the credit market is analyzed. A bank, for limited funds, can finance one of two potential firms, a LMF or a PMF, both with similar project size. The Italian case is taken into account: the law n. 142s2001 has equalized the position of workers and members of a LMF as (own) firm creditors during a liquidation. This has an effect on the structure of creditors priorities in case a firm goes bankrupt and, in particular, on money-lenders likelihood of getting their loans back. It is argued that, before the law, the LMF had in general an advantage on the PMF, from banks viewpoint, for it faced a lower moral hazard problem on effort contribution. After the law, even though the direct consequence seems to be a draw back in LMF credit-worthiness, the model shows that, on given conditions, this type of firm remains more competitive as a bank borrower. Copyright