Lending to Overconfident Borrowers

66 Pages Posted: 8 Feb 2021 Last revised: 16 Jun 2023

See all articles by Filippo De Marco

Filippo De Marco

Bocconi University - Department of Finance; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research; CEPR Financial Economics

Julien Sauvagnat

Bocconi University; Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research

Enrico Sette

Bank of Italy

Multiple version iconThere are 2 versions of this paper

Date Written: June 14, 2023

Abstract

We study how banks lend to overconfident borrowers. For identification, we exploit variation in pupils’ overconfidence across areas in Italy. We find that borrowers born in overconfident areas make larger forecast errors on future sales, pay higher loan rates and are more likely to be denied credit. Consistent with a credit market model where borrowers have biased beliefs, collateral-based banks are more likely to grant credit to overconfident borrowers, who then invest and default more than others. We estimate that bad loans in Italy would be €10 billion (8%) lower in 2017 if banks relied less on collateral when lending to overconfident borrowers.

Keywords: overconfidence; loan applications; default; corporate investment; collateral requirements.

JEL Classification: G21

Suggested Citation

De Marco, Filippo and Sauvagnat, Julien and Sette, Enrico, Lending to Overconfident Borrowers (June 14, 2023). Available at SSRN: https://ssrn.com/abstract=3761940 or http://dx.doi.org/10.2139/ssrn.3761940

Filippo De Marco (Contact Author)

Bocconi University - Department of Finance ( email )

Department of Finance
Via Roentgen 1
Milano, MI 20136
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

CEPR Financial Economics ( email )

London
United Kingdom

Julien Sauvagnat

Bocconi University ( email )

Via Sarfatti, 25
Milan, MI 20136
Italy

Bocconi University - IGIER - Innocenzo Gasparini Institute for Economic Research ( email )

Via Roentgen 1
Milan, 20136
Italy

Enrico Sette

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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