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Pessimism, Optimism and Credit Rationing

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  • Jean-Louis Arcand

    (CERDI - Centre d'Études et de Recherches sur le Développement International - UdA - Université d'Auvergne - Clermont-Ferrand I - CNRS - Centre National de la Recherche Scientifique)

Abstract

In their celebrated contribution on credit rationing, Stiglitz and Weiss (1981) showed that the expected return to the borrower on a loan is increasing in the risk of the project it funds. In this paper, I show that their results do not necessarily carry over to the case where the agents' preferences can be described by rank-dependent expected utility (RDEU). In particular, a pessimistic probability distortion function for borrowers can yield sufficient concavity in returns for the latter to be decreasing in risk, thus eliminating adverse selection. Whether credit rationing can obtain or not is then shown to depend upon the interaction between borrower pessimism and lender optimism.

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  • Jean-Louis Arcand, 2011. "Pessimism, Optimism and Credit Rationing," Working Papers halshs-00562645, HAL.
    • Handle: RePEc:hal:wpaper:halshs-00562645
    Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00562645
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    References listed on IDEAS

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    1. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
    2. Demers, Fanny & Demers, Michel, 1990. "Price uncertainty, the competitive firm and the dual theory of choice under risk," European Economic Review, Elsevier, vol. 34(6), pages 1181-1199, September.
    3. Roell, Ailsa A, 1987. "Risk Aversion in Quiggin and Yaari's Rank-Order Model of Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 97(388a), pages 143-159, Supplemen.
    4. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
    5. Gilboa, Itzhak, 1987. "Expected utility with purely subjective non-additive probabilities," Journal of Mathematical Economics, Elsevier, vol. 16(1), pages 65-88, February.
    6. Schmeidler, David, 1989. "Subjective Probability and Expected Utility without Additivity," Econometrica, Econometric Society, vol. 57(3), pages 571-587, May.
    7. Chateauneuf, Alain & Cohen, Michele & Meilijson, Isaac, 2004. "Four notions of mean-preserving increase in risk, risk attitudes and applications to the rank-dependent expected utility model," Journal of Mathematical Economics, Elsevier, vol. 40(5), pages 547-571, August.
    8. Sergei Guriev, 2001. "On Microfoundations of the Dual Theory of Choice," The Geneva Risk and Insurance Review, Palgrave Macmillan;International Association for the Study of Insurance Economics (The Geneva Association), vol. 26(2), pages 117-137, September.
    9. 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.
    10. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
    11. Wette, Hildegard C, 1983. "Collateral in Credit Rationing in Markets with Imperfect Information: Note," American Economic Review, American Economic Association, vol. 73(3), pages 442-445, June.
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    Keywords

    Keywords: rank-dependent expected utility; credit rationing;

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