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Costly Information Production Equilibria in the Bank Credit Market with Applications to Credit Rationing

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  • Thakor, Anjan V.
  • Callaway, Richard

Abstract

In this paper we explore the nature of equilibria in an asymmetrically informed bank credit market in which credit applicants know their own (intrinsic) default risks, but potential lenders can discover these default risks only by expending resources to produce information. The resolution of informational asymmetries in the capital market is, in the contemporary view, considered a very import function served by financial intermediaries like commercial banks and, in the opinion of some, even the primary justification for their existence. We, therefore, focus on how the presence of asymmetrice information--in particular, the response of (expected) profit-maximizing banks to it--affects the equilibrium prices and quantities of credit offered in the banking system.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 18 (1983)
Issue (Month): 02 (June)
Pages: 229-256

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Handle: RePEc:cup:jfinqa:v:18:y:1983:i:02:p:229-256_01

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  1. Fried, Joel & Howitt, Peter, 1980. "Credit Rationing and Implicit Contract Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(3), pages 471-87, August.
  2. Campbell, Tim S & Kracaw, William A, 1980. " Information Production, Market Signalling, and the Theory of Financial Intermediation," Journal of Finance, American Finance Association, vol. 35(4), pages 863-82, September.
  3. Jaffee, Dwight M & Modigliani, Franco, 1969. "A Theory and Test of Credit Rationing," American Economic Review, American Economic Association, vol. 59(5), pages 850-72, December.
  4. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  5. Joseph E. Stiglitz, 1973. "The Theory of 'Screening', Education, and the Distribution of Income," Cowles Foundation Discussion Papers 354, Cowles Foundation for Research in Economics, Yale University.
  6. Nelson, Phillip, 1970. "Information and Consumer Behavior," Journal of Political Economy, University of Chicago Press, vol. 78(2), pages 311-29, March-Apr.
  7. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers 41, University of California at Berkeley.
  8. Jaffee, Dwight M, 1972. "A Theory and Test of Credit Rationing: Further Notes," American Economic Review, American Economic Association, vol. 62(3), pages 484-88, June.
  9. Grossman, Sanford J & Stiglitz, Joseph E, 1976. "Information and Competitive Price Systems," American Economic Review, American Economic Association, vol. 66(2), pages 246-53, May.
  10. Baltensperger, Ernst, 1978. "Credit Rationing: Issues and Questions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 10(2), pages 170-83, May.
  11. Rothschild, Michael, 1974. "Searching for the Lowest Price When the Distribution of Prices Is Unknown," Journal of Political Economy, University of Chicago Press, vol. 82(4), pages 689-711, July/Aug..
  12. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
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Cited by:
  1. Anjan V. Thakor, 2004. "Capital Requirements, Monetary Policy, and Aggregate Bank," Finance 0411027, EconWPA.
  2. Thakor, Anjan V., 1996. "The design of financial systems: An overview," Journal of Banking & Finance, Elsevier, vol. 20(5), pages 917-948, June.
  3. Nabi, Mahmoud Sami & Ben Souissi, Souraya, 2011. "Could dishonest banks be disciplined ?," MPRA Paper 32010, University Library of Munich, Germany.
  4. Robert O. Edmister & Gay B. Hatfield, 1995. "The Significance of Porfolio Lenders to Real Estate Brokers," Journal of Real Estate Research, American Real Estate Society, vol. 10(1), pages 57-68.
  5. Parker, Simon C, 2002. "Do Banks Ration Credit to New Enterprises? And Should Governments Intervene? President's Lecture Delivered at the Annual General Meeting of the Scottish Economic Society 4-5 September 2001," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(2), pages 162-95, May.

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