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Credit Rationing: Something's Gotta Give

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  • DAVID DE MEZA
  • DAVID C. WEBB

Abstract

Equilibrium credit rationing, in the sense of Stiglitz and Weiss, is shown to imply that the marginal cost of funds to the borrower is infinite. So entrepreneurs have an overwhelming incentive to cut their loans by a dollar and so avoid rationing. Ways of doing this include scaling down the project, decreasing consumption, or delaying the project to accumulate more savings. Credit rationing emerges for indivisible projects only when delay causes sufficient deterioration. Borrowers then apply for funds at the first opportunity, but, counterfactually, once denied a loan, they never reapply. Conditions for credit rationing are stringent indeed. Copyright (c) The London School of Economics and Political Science 2006.

Suggested Citation

  • David De Meza & David C. Webb, 2006. "Credit Rationing: Something's Gotta Give," Economica, London School of Economics and Political Science, vol. 73(292), pages 563-578, November.
  • Handle: RePEc:bla:econom:v:73:y:2006:i:292:p:563-578
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    Cited by:

    1. Faris Nasif Al-Shubiri, 2011. "Capital Structure and Market Power: Evidence from Jordanian Banks," Managing Global Transitions, University of Primorska, Faculty of Management Koper, vol. 9(3), pages 289-310.
    2. Kjenstad, Einar C. & Su, Xunhua & Zhang, Li, 2015. "Credit rationing by loan size: A synthesized model," The Quarterly Review of Economics and Finance, Elsevier, vol. 55(C), pages 20-27.
    3. Drakos, Konstantinos & Giannakopoulos, Nicholas, 2011. "On the determinants of credit rationing: Firm-level evidence from transition countries," Journal of International Money and Finance, Elsevier, vol. 30(8), pages 1773-1790.
    4. Kjenstad, Einar & Su, Xunhua, 2012. "Credit rationing by loan size: a synthesized model," MPRA Paper 44113, University Library of Munich, Germany.
    5. Giuseppe Coco & Giuseppe Pignataro, 2010. "Inequality of Opportunity in the Credit Market," SERIES 0026, Dipartimento di Economia e Finanza - Università degli Studi di Bari "Aldo Moro", revised Jan 2010.
    6. Lutz G. Arnold & Johannes Reeder & Stefanie Trepl, 2014. "Single-name Credit Risk, Portfolio Risk and Credit Rationing," Economica, London School of Economics and Political Science, vol. 81(322), pages 311-328, April.

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