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Collateral, Rationing, and Government Intervention in Credit Markets

In: Asymmetric Information, Corporate Finance, and Investment

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  • William G. Gale

Abstract

This paper analyzes the effects of government intervention in credit markets when lenders use collateral, interest, and the probability of granting a loan as potential screening devices. Equilibria with and without rationing are examined. The principal theme is that credit policies operate through their effect on the incentive compatibility constraint, which inhibits high-risk borrowers from mimicking the behavior of low-risk borrowers. Any policy that loosens (tightens) the constraint raises (reduces) efficiency. Most government credit programs explicitly attempt to fund investors that cannot obtain private financing. In the model presented here, these subsidies increase the extent of rationing and reduce efficiency. In contrast, policies that subsidize the nonrationed borrowers, or all borrowers, are efficiency enhancing, and reduce the extent of rationing.

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This chapter was published in:

  • R. Glenn Hubbard, 1990. "Asymmetric Information, Corporate Finance, and Investment," NBER Books, National Bureau of Economic Research, Inc, number glen90-1.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 11467.

    Handle: RePEc:nbr:nberch:11467

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    References

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    1. Bruce D. Smith & Michael J. Stutzer, 1989. "Credit Rationing and Government Loan Programs: A Welfare Analysis," Real Estate Economics, American Real Estate and Urban Economics Association, American Real Estate and Urban Economics Association, vol. 17(2), pages 177-193.
    2. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 75(4), pages 850-55, September.
    3. N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," NBER Working Papers 1786, National Bureau of Economic Research, Inc.
    4. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 90(4), pages 630-49, November.
    5. Wette, Hildegard C, 1983. "Collateral in Credit Rationing in Markets with Imperfect Information: Note," American Economic Review, American Economic Association, American Economic Association, vol. 73(3), pages 442-45, June.
    6. Barro, Robert J, 1976. "The Loan Market, Collateral, and Rates of Interest," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 8(4), pages 439-56, November.
    7. Stephen D. Williamson, 1984. "Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing," Working Papers, Queen's University, Department of Economics 572, Queen's University, Department of Economics.
    8. Yotsuzuka, Toshiki, 1987. "Ricardian equivalence in the presence of capital market imperfections," Journal of Monetary Economics, Elsevier, Elsevier, vol. 20(2), pages 411-436, September.
    9. Yuk-Shee Chan & Anjan V. Thakor, 2004. "Collateral and Competitive Equilibria with Moral Hazard and Private Information," Finance, EconWPA 0411019, EconWPA.
    10. Besanko, David & Thakor, Anjan V, 1987. "Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 671-89, October.
    11. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, American Economic Association, vol. 71(3), pages 393-410, June.
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    Cited by:
    1. Rajalaxmi Kamath, 2006. "Public inputs and the credit market," International Tax and Public Finance, Springer, Springer, vol. 13(6), pages 733-753, November.
    2. Giovanni Busetta & Alberto Zazzaro, 2009. "Mutual Loan-Guarantee Societies in Monopolistic Credit Markets with Adverse Selection," Mo.Fi.R. Working Papers, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences 33, Money and Finance Research group (Mo.Fi.R.) - Univ. Politecnica Marche - Dept. Economic and Social Sciences.
    3. Jeffrey M. Lacker, 1991. "Why is there debt?," Economic Review, Federal Reserve Bank of Richmond, Federal Reserve Bank of Richmond, issue Jul, pages 3-19.
    4. Patrick Artus, 1993. "Crises financières et cycle réel : Le rôle des imperfections du marché du crédit," Revue d'Économie Financière, Programme National Persée, Programme National Persée, vol. 26(3), pages 89-107.
    5. Karla Hoff & Andrew B. Lyon, 1994. "Non-Leaky Buckets: Optimal Redistributive Taxation and Agency Costs," NBER Working Papers 4652, National Bureau of Economic Research, Inc.
    6. Takis Venetoklis, 2001. "Business Subsidies and Bureaucratic Behaviour - A Revised Approach," Research Reports 83, Government Institute for Economic Research Finland (VATT).
    7. Iichiro Uesugi & Koji Sakai & Guy M. Yamashiro, 2006. "Effectiveness of Credit Guarantees in the Japanese Loan Market," Discussion papers, Research Institute of Economy, Trade and Industry (RIETI) 06004, Research Institute of Economy, Trade and Industry (RIETI).
    8. Anginer, Deniz & de la Torre, Augusto & Ize, Alain, 2014. "Risk-bearing by the state: When is it good public policy?," Journal of Financial Stability, Elsevier, Elsevier, vol. 10(C), pages 76-86.
    9. Schmieding, Holger, 1991. "Transforming the financial system in Eastern Europe's market economies: A proposal for clean balance sheets and an institutional transfer," Kiel Working Papers 497, Kiel Institute for the World Economy.
    10. Dailami, Mansoor & Kim, E. Han, 1991. "The effects of debt subsidies on corporate investment behavior," Policy Research Working Paper Series 727, The World Bank.
    11. David de Meza, 2002. "Overlending?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(477), pages F17-F31, February.
    12. Anginer, Deniz & de la Torre, Augusto & Ize, Alain, 2011. "Risk absorption by the state: when is it good public policy ?," Policy Research Working Paper Series 5893, The World Bank.
    13. Takis Venetoklis, 2001. "Business Subsidies and Bureaucratic Behaviour," Research Reports 79, Government Institute for Economic Research Finland (VATT).
    14. Ma, Chien-Hui & Smith, Bruce D., 1996. "Credit market imperfections and economic development: Theory and evidence," Journal of Development Economics, Elsevier, Elsevier, vol. 48(2), pages 351-387, March.
    15. Karel Janda, 2011. "Credit Guarantees and Subsidies when Lender has a Market Power," Working Papers IES, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies 2011/18, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jun 2011.

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