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Single-Name Credit Risk, Portfolio Risk, and Credit Rationing

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  • Arnold, Lutz G.

    ()

  • Reeder, Johannes

    ()

  • Trepl , Stefanie

    ()

Abstract

This paper introduces non-diversifiable risk in the Stiglitz-Weiss adverse selection model, so that an increase in the average riskiness of the borrower pool causes higher portfolio risk. This opens up the possibility of equilibrium credit rationing. Comparative statics analysis shows that an increase in risk aversion turns a two-price equilibrium into a rationing equilibrium. A two-price equilibrium is more inefficient than a rationing equilibrium, and a usury law that rules out the higher of the two interest rates can be welfare-improving. Contrary to the common result, the equilibrium may be characterized by over-investment.

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File URL: http://epub.uni-regensburg.de/17365/1/448_crisk.pdf
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Bibliographic Info

Paper provided by University of Regensburg, Department of Economics in its series University of Regensburg Working Papers in Business, Economics and Management Information Systems with number 448.

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Date of creation: 2010
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Handle: RePEc:bay:rdwiwi:17365

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Keywords: asymmetric information; credit rationing;

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  1. Lutz G. Arnold & John G. Riley, 2009. "On the Possibility of Credit Rationing in the Stiglitz-Weiss Model," American Economic Review, American Economic Association, vol. 99(5), pages 2012-21, December.
  2. David De Meza & David C. Webb, 2006. "Credit Rationing: Something's Gotta Give," Economica, London School of Economics and Political Science, vol. 73(292), pages 563-578, November.
  3. Coco, G., 1998. "On the Use of Collateral," Discussion Papers 9805, Exeter University, Department of Economics.
  4. David De Meza & Giuseppe Coco, 2001. "In Defence of Usury Laws," FMG Discussion Papers dp369, Financial Markets Group.
  5. Coco, G., 1997. "Credit Rationing and the Welfare Gain from Usury Laws," Discussion Papers 9715, Exeter University, Department of Economics.
  6. Machin, Stephen & Van Reenen, John, 1993. "Profit Margins and the Business Cycle: Evidence from UK Manufacturing Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 41(1), pages 29-50, March.
  7. Lensink, Robert & Sterken, Elmer, 2002. "The Option to Wait to Invest and Equilibrium Credit Rationing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 221-25, February.
  8. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 281-92, May.
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