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Single-Name Credit Risk, Portfolio Risk, and Credit Rationing

  • Arnold, Lutz G.

    ()

  • Reeder, Johannes

    ()

  • Trepl , Stefanie

    ()

This paper introduces non-diversifiable risk in the Stiglitz-Weiss adverse selection model, so that an increase in the average riskiness of the borrower pool causes higher portfolio risk. This opens up the possibility of equilibrium credit rationing. Comparative statics analysis shows that an increase in risk aversion turns a two-price equilibrium into a rationing equilibrium. A two-price equilibrium is more inefficient than a rationing equilibrium, and a usury law that rules out the higher of the two interest rates can be welfare-improving. Contrary to the common result, the equilibrium may be characterized by over-investment.

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File URL: http://epub.uni-regensburg.de/17365/1/448_crisk.pdf
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Paper provided by University of Regensburg, Department of Economics in its series University of Regensburg Working Papers in Business, Economics and Management Information Systems with number 448.

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Date of creation: 2010
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Handle: RePEc:bay:rdwiwi:17365
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Web page: http://www-wiwi.uni-regensburg.de/
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  1. Giuseppe Coco & David de Meza, 2001. "In defence of usury laws," LSE Research Online Documents on Economics 25042, London School of Economics and Political Science, LSE Library.
  2. Lensink, Robert & Sterken, Elmer, 2002. "The Option to Wait to Invest and Equilibrium Credit Rationing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 221-25, February.
  3. Machin, Stephen & Van Reenen, John, 1993. "Profit Margins and the Business Cycle: Evidence from UK Manufacturing Firms," Journal of Industrial Economics, Wiley Blackwell, vol. 41(1), pages 29-50, March.
  4. Lutz G. Arnold & John G. Riley, 2009. "On the Possibility of Credit Rationing in the Stiglitz-Weiss Model," American Economic Review, American Economic Association, vol. 99(5), pages 2012-21, December.
  5. Coco, G., 1998. "On the Use of Collateral," Discussion Papers 9805, Exeter University, Department of Economics.
  6. de Meza, David & Webb, David C, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, MIT Press, vol. 102(2), pages 281-92, May.
  7. 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.
  8. Coco, G., 1997. "Credit Rationing and the Welfare Gain from Usury Laws," Discussion Papers 9715, Exeter University, Department of Economics.
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