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Title:Loans, insurance and failures in the credit market for students PDF Logo
Authors:Del Rey, Elena
Verheyden, Bertrand
Issue Date:2011
Series/Report no.:CESifo working paper: Public Finance 3410
Abstract:In the education literature, it is generally acknowledged that both credit and insurance for students are rationed. In order to provide a rationale for these observations, we present a model with perfectly competitive banks and risk averse students who have private information on their ability to learn and can decide to default on debt. We show that the combination of ex-post moral hazard and adverse selection produces credit market rationing when default penalties are low. When default penalties increase, the level of student risk aversion proves crucial in determining the market outcome. If risk aversion is low, banks offer non-insuring pooling contracts at equilibrium that may result in overinvestment in education. If student risk aversion is high, high ability students are separated and student loan contracts involve a limited amount of insurance.
Subjects:ex-post moral hazard
adverse selection
income contingent loans
Document Type:Working Paper
Appears in Collections:CESifo Working Papers, CESifo Group Munich

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