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Credit rationing by loan size: a synthesized model

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  • Kjenstad, Einar
  • Su, Xunhua

Abstract

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.

Suggested Citation

  • Kjenstad, Einar & Su, Xunhua, 2012. "Credit rationing by loan size: a synthesized model," MPRA Paper 44113, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:44113
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    References listed on IDEAS

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    More about this item

    Keywords

    agency cost; Jaffee and Rusell; loan size; collateral;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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