Credit Markets with Ethical Banks and Motivated Borrowers

Quaderni DSE Working Paper No. 786

44 Pages Posted: 16 Sep 2011 Last revised: 18 Dec 2012

See all articles by Francesca Barigozzi

Francesca Barigozzi

University of Bologna - Department of Economics

Piero Tedeschi

Università Cattolica; Catholic University of the Sacred Heart of Milan

Date Written: November 2012

Abstract

This paper investigates banks’ corporate social responsibility. The credit market is composed of two sectors: one for standard and one for ethical projects. Since ethical banks are committed to investing in ethical projects, standard and ethical banks compete in the market for ethical projects. The latter have also a social profitability, but a lower expected revenue with respect to standard ones. If their expected revenue is not too low, ethical projects are undertaken by motivated borrowers. The latter obtain a benefit (a social responsibility premium) from accomplishing ethical projects in general and a premium for successful interaction when trading with ethical banks in the case the project is successful.

If the expected profitability of ethical projects is sufficiently close to that of standard ones and/or the premium for successful interaction of motivated borrowers is sufficiently high, ethical banks are active, both sectors of the credit market exist and the whole market is fully segmented. This result holds true irrespective of the information structure: only moral hazard on the borrower side, moral hazard and screening on the borrower side. The optimal contract in our set-up is always a debt contract. However, its precise form and welfare properties depend on the information structure.

Keywords: corporate social responsibility, ethical banks, motivated borrowers

JEL Classification: D86, G21, G30

Suggested Citation

Barigozzi, Francesca and Tedeschi, Piero, Credit Markets with Ethical Banks and Motivated Borrowers (November 2012). Quaderni DSE Working Paper No. 786, Available at SSRN: https://ssrn.com/abstract=1928503 or http://dx.doi.org/10.2139/ssrn.1928503

Francesca Barigozzi (Contact Author)

University of Bologna - Department of Economics ( email )

P.zza Scaravilli 2
40126 Bologna, 40126
Italy

Piero Tedeschi

Università Cattolica ( email )

United States
+390272342779 (Phone)
+390272342781 (Fax)

Catholic University of the Sacred Heart of Milan

Italy

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