Credit Markets with Ethical Banks and Motivated Borrowers
Abstract: We investigate banks' corporate social responsibility. Banks offer loans to standard and motivated borrowers in the credit market and can finance both standard and ethical projects. Standard banks loan both kinds of projects. Ethical banks commit to financing only ethical projects, which have social profitability but lower expected revenues. Motivated borrowers are keen to invest in ethical projects and to deal with ethical banks. Conditions for existence and social efficiency of ethical banks are stated. Efficiency is mainly induced by the "ethical collateral" provided by motivated borrowers to ethical banks. Model predictions are consistent with available data on ethical banks.
