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Credit rationing by loan size: a synthesized model

  • Kjenstad, Einar
  • Su, Xunhua

We construct a unified framework to study credit rationing by the loan size. Due to default risk, the loan offer curve is positive-sloping. At the equilibrium interest rate, increasing the loan size reduces the average cost of the loan, so the borrower always demands a larger loan than that the lender can offer even in a perfect credit market. We show that any agency cost may shift the loan offer curve upwards, enlarging the excess demand further. If agency costs are sufficiently high, the borrower is unable to obtain the loan that she needs at any interest rate. This is the common logic underlying the ex-post agency models of credit rationing.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 44113.

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Date of creation: Jul 2012
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Handle: RePEc:pra:mprapa:44113
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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. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
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  7. 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.
  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. Wette, Hildegard C, 1983. "Collateral in Credit Rationing in Markets with Imperfect Information: Note," American Economic Review, American Economic Association, vol. 73(3), pages 442-45, June.
  10. de Mesa, David & Webb, David C., 1992. "Efficient credit rationing," European Economic Review, Elsevier, vol. 36(6), pages 1277-1290, August.
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  12. Jaffee, Dwight & Stiglitz, Joseph, 1990. "Credit rationing," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 2, chapter 16, pages 837-888 Elsevier.
  13. Allen N. Berger & Gregory F. Udell, 1990. "Some evidence on the empirical significance of credit rationing," Finance and Economics Discussion Series 105, Board of Governors of the Federal Reserve System (U.S.).
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  18. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  19. Jeremy C. Stein, 1995. "Internal Capital Markets and the Competition for Corporate Resources," NBER Working Papers 5101, National Bureau of Economic Research, Inc.
  20. Berger, Allen N. & Espinosa-Vega, Marco A. & Frame, W. Scott & Miller, Nathan H., 2011. "Why do borrowers pledge collateral? New empirical evidence on the role of asymmetric information," Journal of Financial Intermediation, Elsevier, vol. 20(1), pages 55-70, January.
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  23. 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.
  24. Berger, Allen N. & Scott Frame, W. & Ioannidou, Vasso, 2011. "Tests of ex ante versus ex post theories of collateral using private and public information," Journal of Financial Economics, Elsevier, vol. 100(1), pages 85-97, April.
  25. Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, Oxford University Press, vol. 109(4), pages 841-879.
  26. Dwight M. Jaffee & Thomas Russell, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, Oxford University Press, vol. 90(4), pages 651-666.
  27. Stacey L. Schreft & Anne P. Villamil, 1992. "Credit rationing by loan size in commercial loan markets," Economic Review, Federal Reserve Bank of Richmond, issue May, pages 3-8.
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