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.
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- 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.
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- Lutz G. Arnold & John G. Riley, 2009.
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American Economic Review,
American Economic Association, vol. 99(5), pages 2012-21, December.
- 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.
- Coco, G., 1998.
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9805, Exeter University, Department of Economics.
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- 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., 1997. "Credit Rationing and the Welfare Gain from Usury Laws," Discussion Papers 9715, Exeter University, Department of Economics.
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