A Theory of Discouraged Borrowers

Kon, Y and Storey, D J (2003) A Theory of Discouraged Borrowers. Small Business Economics, 21 (1). pp. 37-49. ISSN 0921898X

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Abstract

This paper examines the implications for the SME financing market of Application costs that vary between firms, and of imperfect screening of applicants by Banks. Under these conditions 'Discouraged Borrowers' can exist. These are good borrowers who do not apply for a bank loan because they feel they will be rejected. The paper shows that, under a range of assumptions, the scale of discouragement in an economy depends upon the screening error of the banks, the scale of Application costs and the extent to which the bank interest rate differs from that charged by the moneylender. Discouragement is shown to be at a maximum where there is some, but not perfect, information.

Item Type: Article
Schools and Departments: School of Business, Management and Economics > Business and Management
Depositing User: David Storey
Date Deposited: 06 Feb 2012 20:42
Last Modified: 23 Mar 2012 15:06
URI: http://sro.sussex.ac.uk/id/eprint/27603
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