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Credit rationing by loan size: a synthesized model

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  • Kjenstad, Einar
  • Su, Xunhua

Abstract

We construct a unified framework to study credit rationing by the loan size. Due to default risk, the loan offer curve is positive-sloping. At the equilibrium interest rate, increasing the loan size reduces the average cost of the loan, so the borrower always demands a larger loan than that the lender can offer even in a perfect credit market. We show that any agency cost may shift the loan offer curve upwards, enlarging the excess demand further. If agency costs are sufficiently high, the borrower is unable to obtain the loan that she needs at any interest rate. This is the common logic underlying the ex-post agency models of credit rationing.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 44113.

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Date of creation: Jul 2012
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Handle: RePEc:pra:mprapa:44113

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Related research

Keywords: agency cost; Jaffee and Rusell; loan size; collateral;

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