Mitigating Judgment Proofness: Information Acquisition vs. Extended Liability
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Joshua Anyangah
Abstract
We present a simple lending model of judgment proof borrowers with private information and heterogeneous wealth, where large and small lenders coexist. Lenders subject would-be borrowers to pre-lending screening, which is not observable and cannot therefore be committed to ex ante. We document market segmentation and credit rationing: borrowers with limited wealth, who face a less severe moral hazard, are funded by large lenders; wealthy borrowers turn to small lenders who face a higher cost of capital; borrowers with abundant wealth do not get any financing. With advances in the screening technology, large lenders (small lenders) contract (expand) their loan portfolio. In contrast, as a result of an increase in the liability of lenders, large lenders (small lenders) increase (decrease) the number of loans that they make. The qualitative impact on social welfare of an increase in lender liability or advances in information technology is ambiguously tied to the quality of the borrower pool.
©2012 Walter de Gruyter GmbH & Co. KG, Berlin/Boston
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Articles in the same Issue
- Article
- Are Academics Messy? Testing the Broken Windows Theory with a Field Experiment in the Work Environment
- The Role of Prosecutor's Incentives in Creating Congestion in Criminal Courts
- Political Beliefs and Tort Awards: Evidence of Rationally Political Jurors from Two Data Sets
- Mitigating Judgment Proofness: Information Acquisition vs. Extended Liability
- Decoupled Liability and Efficiency: An Impossibility Theorem
- Natural Resource Production under Divided Ownership: Evidence from Coalbed Methane
- The Hyperbolic Punishment Function
- Patent Litigation and the Role of Enforcement Insurance
- Contractual Democracy
