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Firm Heterogeneity, Internal Finance, and `Credit Rationing'

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  • Charles W. Calomiris
  • R. Glenn Hubbard

Abstract

Assessing the extent to which agents or firms face capital-market imperfections and quantity restrictions on credit is crucial for measuring intertemporal tradeoffs in consumption or the cost of capital for investment. In contrast to standard price-clearing, "full-information" models of loan markets, in models of credit allocation where information is imperfect (which we describe as "information-intensive"). "the interest rate" need not reflect the shadow price of credit in financial intermediation. Credit rationing to some borrowers is likely. In actual markets, many loan contracts are offered, both "full-information" and "information intensive." Our focus in this paper is on firm heterogeneity in credit markets; we analyze mechanisms by which credit markets sort borrowers in the presence of differing degrees of asymmetric information; we emphasize the potential for credit rationing in equilibrium and the response of credit allocation to borrower-specific shocks. Our approach suggests that external finance will be differentially available to entrepreneurs --holding constant their project opportunities -- according to their internal net worth position. That is, there is an important link for many firms between internal finance and investment spending. We develop a simple general equilibrium model of credit allocation, in which different loan contracts are offered to different types of borrowers. The extent to which different borrowers can obtain credit depends on the distribution of internal finance, aggregate net worth levels, and whether projects are observable. While credit restrictions to some classes of borrowers are a feature of a multiple-contract equilibrium, the severity can vary substantially in response to financial disturbances. We consider shocks to borrowers' net worth. Credit restrictions may occur in response to a deterioration of net-worth positions., A "credit collapse," in which no loans are offered to certain types of borrowers is possible. Investment and financing decisions are not, in general independent. We discuss implications for tax policy and for public policy toward financial institutions.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2497.

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Date of creation: Jan 1988
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Publication status: published as The Economic Journal, Vol. 100, No. 399, pp. 90-104, (March 1990).
Handle: RePEc:nbr:nberwo:2497

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  1. Steven M. Fazzari & R. Glenn Hubbard & BRUCE C. PETERSEN, 1988. "Financing Constraints and Corporate Investment," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 19(1), pages 141-206.
  2. N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," NBER Working Papers 1786, National Bureau of Economic Research, Inc.
  3. Benjamin M. Friedman, 1982. "Debt and Economic Activity in the United States," NBER Working Papers 0704, National Bureau of Economic Research, Inc.
  4. Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
  5. Hayne E. Leland and David H. Pyle., 1976. "Informational Asymmetries, Financial Structure, and Financial Intermediation," Research Program in Finance Working Papers, University of California at Berkeley 41, University of California at Berkeley.
  6. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
  7. Bernanke, Ben S, 1981. "Bankruptcy, Liquidity, and Recession," American Economic Review, American Economic Association, vol. 71(2), pages 155-59, May.
  8. King, Stephen R, 1986. "Monetary Transmission: Through Bank Loans or Bank Liabilities?," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 18(3), pages 290-303, August.
  9. Ben S. Bernanke & Mark L. Gertler, 1985. "Banking in General Equilibrium," NBER Working Papers 1647, National Bureau of Economic Research, Inc.
  10. Williamson, Stephen D., 1986. "Costly monitoring, financial intermediation, and equilibrium credit rationing," Journal of Monetary Economics, Elsevier, vol. 18(2), pages 159-179, September.
  11. R. Glenn Hubbard & Kenneth L. Judd, 1986. "Liquidity Constraints, Fiscal Policy, and Consumption," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(1), pages 1-60.
  12. Hubbard, R Glenn & Judd, Kenneth L, 1987. "Social Security and Individual Welfare: Precautionary Saving, Borrowing Constraints, and the Payroll Tax," American Economic Review, American Economic Association, vol. 77(4), pages 630-46, September.
  13. James M. Poterba, 1987. "Tax Policy and Corporate Saving," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(2), pages 455-516.
  14. Boyd, John H. & Prescott, Edward C., 1986. "Financial intermediary-coalitions," Journal of Economic Theory, Elsevier, vol. 38(2), pages 211-232, April.
  15. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 102(2), pages 281-92, May.
  16. Bernanke, Ben S., 1986. "Alternative explanations of the money-income correlation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 25(1), pages 49-99, January.
  17. Ben Bernanke & Mark Gertler, 1987. "Financial Fragility and Economic Performance," NBER Working Papers 2318, National Bureau of Economic Research, Inc.
  18. Greenwald, Bruce & Stiglitz, Joseph E & Weiss, Andrew, 1984. "Informational Imperfections in the Capital Market and Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 74(2), pages 194-99, May.
  19. Charles W. Calomiris & R. Glenn Hubbard & James H. Stock, 1986. "The Farm Debt Crisis and Public Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(2), pages 441-486.
  20. Benjamin M. Friedman, 1982. "Debt and Economic Activity in the United States," NBER Chapters, in: The Changing Roles of Debt and Equity in Financing U.S. Capital Formation, pages 91-110 National Bureau of Economic Research, Inc.
  21. Otto Eckstein & Allen Sinai, 1986. "The Mechanisms of the Business Cycle in the Postwar Era," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 39-122 National Bureau of Economic Research, Inc.
  22. 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.
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