Over-optimism and consumer credit regulation
Alex Graur
Some consumers are over-optimistic about their future income and underestimate the probability of experiencing negative income shocks, while others have more accurate (‘rational’) beliefs. This column introduces a framework that considers behavioural and rational borrowers to assess the effects of potential regulatory interventions. Over-optimists benefit from being partially pooled with (‘cross-subsidised’ by) rational borrowers. Small-scale financial literacy education leads to welfare gains
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