Single-Name Credit Risk, Portfolio Risk, and Credit Rationing
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.
|Date of creation:||2010|
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- David de Meza & David C. Webb, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, Oxford University Press, vol. 102(2), pages 281-292.
- Arnold, Lutz G., 2005.
"On the Possibility of Credit Rationing in the Stiglitz-Weiss Model,"
University of Regensburg Working Papers in Business, Economics and Management Information Systems
403, University of Regensburg, Department of Economics.
- 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 2012-2021, December.
- 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.
- 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.
- Coco, G., 1998.
"On the Use of Collateral,"
9805, Exeter University, Department of Economics.
- Coco, G., 1997. "Credit Rationing and the Welfare Gain from Usury Laws," Discussion Papers 9715, Exeter University, Department of Economics.
- 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 221-225, February.
- 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.
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