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Collateral, Rationing, and Government Intervention in Credit Markets

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William G. Gale

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3024.

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Date of creation: Jul 1989
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Handle: RePEc:nbr:nberwo:3024

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. 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, vol. 28(3), pages 671-89, October. [Downloadable!] (restricted)
  2. 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, vol. 90(4), pages 630-49, November.
  3. N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," NBER Working Papers 1786, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  4. 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, vol. 17(2), pages 177-193. [Downloadable!] (restricted)
  5. Yotsuzuka, Toshiki, 1987. "Ricardian equivalence in the presence of capital market imperfections," Journal of Monetary Economics, Elsevier, vol. 20(2), pages 411-436, September. [Downloadable!] (restricted)
  6. Williamson, Stephen D, 1987. "Costly Monitoring, Loan Contracts, and Equilibrium Credit Rationing," The Quarterly Journal of Economics, MIT Press, vol. 102(1), pages 135-45, February. [Downloadable!] (restricted)
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  7. 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. [Downloadable!] (restricted)
  8. Chan, Yuk-Shee & Thakor, Anjan V, 1987. " Collateral and Competitive Equilibria with Moral Hazard and Private Information," Journal of Finance, American Finance Association, vol. 42(2), pages 345-63, June. [Downloadable!] (restricted)
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  9. Barro, Robert J, 1976. "The Loan Market, Collateral, and Rates of Interest," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 8(4), pages 439-56, November. [Downloadable!] (restricted)
  10. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September. [Downloadable!] (restricted)
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Iichiro Uesugi & Koji Sakai & Guy M. Yamashiro, 2006. "Effectiveness of Credit Guarantees in the Japanese Loan Market," Discussion papers 06004, Research Institute of Economy, Trade and Industry (RIETI). [Downloadable!]
  2. David de Meza, 2002. "Overlending?," Economic Journal, Royal Economic Society, vol. 112(477), pages F17-F31, February. [Downloadable!] (restricted)
  3. repec:fip:fedreq:y:1991:i:jul:p:3-19:n:v.77no.4 is not listed on IDEAS
  4. Karel Janda, 2008. "Which Government Interventions Are Good in Alleviating Credit Market Failures?," Working Papers IES 2008/12, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Jul 2008. [Downloadable!]
  5. Takis Venetoklis, 2001. "Business Subsidies and Bureaucratic Behaviour," Research Reports 79, Government Institute for Economic Research Finland (VATT). [Downloadable!]
  6. Dailami, Mansoor & Kim, E. Han, 1991. "The effects of debt subsidies on corporate investment behavior," Policy Research Working Paper Series 727, The World Bank. [Downloadable!]
  7. Becchetti Leonardo & Londoño Bedoya David, 2006. "The selection of investment subsidy beneficiaries. An estimate of the differences between national and regional policymakers priorities," Departmental Working Papers 244, Tor Vergata University, CEIS. [Downloadable!]
    Other versions:
  8. 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. [Downloadable!] (restricted)
    Other versions:
  9. Takis Venetoklis, 2001. "Business Subsidies and Bureaucratic Behaviour - A Revised Approach," Research Reports 83, Government Institute for Economic Research Finland (VATT). [Downloadable!]
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