On information extended liability and judgment pr

Authors: Joshua Okeyo Anyangah

Publish Date: 2011/11/11

Volume: 14, Issue: 1, Pages: 61-84

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Abstract

We use a simple lending model with endogenous screening to compare the impact of improvements in the cost of acquiring information and increases in the liability of lenders for environmental harm caused by their borrowers In the model judgment proof borrowers have private information about their underlying risk represented by the probability of an accident Screening enables lenders to receive a noisy signal about their borrowers’ risk type ex ante We show that a decrease in the cost of information exacerbates credit rationing By contrast an increase in lender liability leads to a reduction in the extent to which credit is rationed The impact on social welfare crucially depends on the mix of borrowertype in the population an increase in extended liability is likely to improve social welfare if there is an abundance of good borrowers in the population improvements in the information system are likely to enhance social welfare if the proportion of good risks is sufficiently low

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