On the Possibility of Credit Rationing in the Stiglitz-Weiss Model

Contrary to what is usually assumed, the expected revenue for lenders as a function of the loan rate cannot be globally hump-shaped in the Stiglitz-Weiss (1981) adverse selection model with a continuum of types. This has important implications. First, if there is credit rationing, there must be at l...

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Bibliographic Details
Published in:The American economic review 2009-12, Vol.99 (5), p.2012-2021
Main Authors: Arnold, Lutz G., Riley, John G.
Format: Article
Language:English
Subjects:
Adverse selection
Applicants
Bank loans
Bankruptcy
Capital markets
Collateral
Credit market
Credit rationing
Demand loans
Economic models
Economics
Equilibrium
Financial models
Interest rates
Lenders
Loan rates
Loans
Money and credit
Numerical analysis
Random variables
Rationing
Revenue
Studies
Willingness to pay
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Summary:Contrary to what is usually assumed, the expected revenue for lenders as a function of the loan rate cannot be globally hump-shaped in the Stiglitz-Weiss (1981) adverse selection model with a continuum of types. This has important implications. First, if there is credit rationing, there must be at least two equilibrium loan rates. Second, while at the low rate loans are rationed, all those applicants willing to pay the high rate are then served. Numerical analysis shows that unless the joint distribution of risk class and output is rather special, the two loan rate outcome with rationing is unlikely.
ISSN:0002-8282
1944-7981
DOI:10.1257/aer.99.5.2012