American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Selling Dreams: Endogenous Optimism in Lending Markets
American Economic Journal: Microeconomics
(pp. 492–524)
Abstract
We propose a model of borrower optimism in competitive lending markets with asymmetric information. Borrowers engage in self-deception to arrive at beliefs that optimally trade off the anticipatory utility benefits and material costs of optimism. Lenders' contract design shapes these benefits and costs. The model yields three key results. First, the borrower's motivated cognition increases her material welfare, which explains why it is not driven out of markets. Second, in line with empirical evidence, a low cost of lending and a booming economy lead to optimism and the widespread collateralization of loans. Third, equilibrium collateral requirements may be inefficiently high.Citation
Bridet, Luc, and Peter Schwardmann. 2024. "Selling Dreams: Endogenous Optimism in Lending Markets." American Economic Journal: Microeconomics 16 (3): 492–524. DOI: 10.1257/mic.20200285Additional Materials
JEL Classification
- D82 Asymmetric and Private Information; Mechanism Design
- D86 Economics of Contract: Theory
- D91 Micro-Based Behavioral Economics: Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
- G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
- G31 Capital Budgeting; Fixed Investment and Inventory Studies; Capacity
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- L26 Entrepreneurship