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Credit market failures and policy

  • MINELLI, Enrico
  • MODICA, Salvatore

In a simple model of the credit market, based on Stiglitz-Weiss (1981), equilibria are computed and optimal policies to correct market failures are characterized. Some widely applied policies, notably interest-rate subsidies and investment subsidies, are compared to theoretical optimum, and an alternative optimal policy is described which we argue is more robust to model misspecification. An insight on the trade-off between credit policy and infrastructural investment is also offered. A discussion of some aspects of regional policy in Italy's Mezzogiorno is finally presented as an application of the analysis.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2003093.

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Date of creation: 00 Dec 2003
Date of revision:
Handle: RePEc:cor:louvco:2003093
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  1. Townsend, Robert M., 1979. "Optimal contracts and competitive markets with costly state verification," Journal of Economic Theory, Elsevier, vol. 21(2), pages 265-293, October.
  2. 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.
  3. Dewatripont, Mathias & Legros, Patrick & Matthews, Steven A, 2002. "Moral Hazard and Capital Structure Dynamics," CEPR Discussion Papers 3487, C.E.P.R. Discussion Papers.
  4. Ordover, Janusz & Weiss, Andrew, 1981. "Information and the Law: Evaluating Legal Restrictions on Competitive Contracts," American Economic Review, American Economic Association, vol. 71(2), pages 399-404, May.
  5. C. Choe, 1998. "A mechanism design approach to an optimal contract under ex ante and ex post private information," Review of Economic Design, Springer, vol. 3(3), pages 237-255.
  6. Hellwig,Martin, 1986. "Some recent developments in the theory of competition in markets with adverse selection," Discussion Paper Serie A 82, University of Bonn, Germany.
  7. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  8. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-55, September.
  9. Innes, Robert, 1991. "Investment and government intervention in credit markets when there is asymmetric information," Journal of Public Economics, Elsevier, vol. 46(3), pages 347-381, December.
  10. Mankiw, N Gregory, 1986. "The Allocation of Credit and Financial Collapse," The Quarterly Journal of Economics, MIT Press, vol. 101(3), pages 455-70, August.
  11. Gale, Douglas & Hellwig, Martin, 1985. "Incentive-Compatible Debt Contracts: The One-Period Problem," Review of Economic Studies, Wiley Blackwell, vol. 52(4), pages 647-63, October.
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