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A Re-examination of Credit Rationing in the Stiglitz and Weiss Model

  • Su, Xunhua

    ()

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

With a more general setting, we illustrate that credit rationing in the Stiglitz and Weiss (1981) model is sensitive to the ranking of projects. Given that the ranking is according to the mean-preserving-spread, adverse selection and moral hazard cannot co-exist and credit rationing occurs only under extreme conditions. Even if a more general ranking according to the second-order-stochastic-dominance allows for the coexistence of adverse selection and moral hazard, credit rationing implies a take-it-or-leave-it choice for both contract parties and requires that borrowers' collateral amounts are positively correlated with their risk. We argue that these required conditions leave little room for the signicance of credit rationing.

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Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2010/14.

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Length: 22 pages
Date of creation: 05 Nov 2010
Date of revision: 31 Dec 2010
Handle: RePEc:hhs:nhhfms:2010_014
Contact details of provider: Postal: NHH, Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Phone: +47 55 95 92 93
Fax: +47 55 95 96 50
Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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  1. 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.
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