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The Near Impossibility of Credit Rationing

Author

Listed:
  • David De Meza

  • David C Webb

Abstract

Equilibrium credit rationing in the sense of Stiglitz and Weiss (1981) implies the marginal cost of funds to the borrower is infinite. So borrowers have an overwhelming incentive to cut their loan by a dollar and thereby avoiding being rationed. Ways of doing this include scaling down the project, cutting consumption or infinitesimally delaying the project to accumulate more saving. All of these routes are normally feasible in which case credit rationing is impossible.

Suggested Citation

  • David De Meza & David C Webb, 2003. "The Near Impossibility of Credit Rationing," FMG Discussion Papers dp459, Financial Markets Group.
    • Handle: RePEc:fmg:fmgdps:dp459
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    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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