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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- 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 2012-21, December.
- David De Meza & Giuseppe Coco, 2001.
"In Defence of Usury Laws,"
FMG Discussion Papers
dp369, Financial Markets Group.
- 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.
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- Coco, Giuseppe, 2000.
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- 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.
- 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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