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The Allocation of Credit and Financial Collapse

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  • N. Gregory Mankiw

Abstract

This paper examines the allocation of credit in a market in which borrowers have greater information concerning their own riskiness than do lenders. It illustrates that (1) the allocation of credit is inefficient and at times can be improved by government intervention, and (2) small changes in the exogenous risk-free interest rate can cause large (discontinuous) changes in the allocation of credit and the efficiency of the market equilibrium. These conclusions suggests a role for government as the lender of last resort.

Suggested Citation

  • N. Gregory Mankiw, 1986. "The Allocation of Credit and Financial Collapse," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 455-470.
  • Handle: RePEc:oup:qjecon:v:101:y:1986:i:3:p:455-470.
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    File URL: http://hdl.handle.net/10.2307/1885692
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    References listed on IDEAS

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    1. Blinder, Alan S & Stiglitz, Joseph E, 1983. "Money, Credit Constraints, and Economic Activity," American Economic Review, American Economic Association, vol. 73(2), pages 297-302, May.
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    5. Dwight M. Jaffee & Thomas Russell, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 651-666.
    6. George A. Akerlof, 1970. "The Market for "Lemons": Quality Uncertainty and the Market Mechanism," The Quarterly Journal of Economics, Oxford University Press, vol. 84(3), pages 488-500.
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