Collateral, Rationing, and Government Intervention in Credit Markets
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.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3024.
Date of creation: Jul 1989
Date of revision:
Publication status: published as William G. Gale. "Collateral, Rationing, and Government Intervention in Credit Markets," in R. Glenn Hubbard, editor, "Asymmetric Information, Corporate Finance, and Investment" University of Chicago Press, 1990 (1990)
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Other versions of this item:
- William G. Gale, 1990. "Collateral, Rationing, and Government Intervention in Credit Markets," NBER Chapters, in: Asymmetric Information, Corporate Finance, and Investment, pages 43-62 National Bureau of Economic Research, Inc.
- 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," UCLA Economics Working Papers 554, UCLA Department of Economics.
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