Collateral, Rationing, and Government Intervention in Credit Markets
In: Asymmetric Information, Corporate Finance, and Investment
AbstractThis 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. Due to an administrative error this identical paper was also issued with the same author and title as Working Paper 3024 . Only the earlier paper number should be cited.
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Other versions of this item:
- William G. Gale, 1989. "Collateral, Rationing, and Government Intervention in Credit Markets," UCLA Economics Working Papers 554, UCLA Department of Economics.
- William G. Gale, 1989. "Collateral, Rationing and Government Intervention in Credit Markets," NBER Working Papers 3083, National Bureau of Economic Research, Inc.
- William G. Gale, 1989. "Collateral, Rationing, and Government Intervention in Credit Markets," NBER Working Papers 3024, National Bureau of Economic Research, Inc.
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