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Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing


  • Stephen D. Williamson


This paper develops a model with asymmetrically informed agents and costly monitoring of loan contracts, where an equilibrium can exhibit credit rationing. Borrowers are identical ex ante, but some receive loans and others do not. In contrast to existing credit rationing theories, rationing does not occur here due to inflexible prices, adverse selection or moral hazard. Optimizing behaviour produces a standard debt contract in equilibrium. The aggregate quantity of loans and equilibrium interest rates respond differently depending on whether there is rationing in equilibrium.

Suggested Citation

  • Stephen D. Williamson, 1984. "Costly Monitoring, Loan Contracts and Equilibrium Credit Rationing," Working Papers 572, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:572

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    References listed on IDEAS

    1. Aghion, Philippe & Howitt, Peter, 1992. "A Model of Growth through Creative Destruction," Econometrica, Econometric Society, vol. 60(2), pages 323-351, March.
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    6. Douglas Gale, 1996. "Delay and Cycles," Review of Economic Studies, Oxford University Press, vol. 63(2), pages 169-198.
    7. Gadi Barlevy, 2004. "The Cost of Business Cycles and the Benefits of Stabilization: A Survey," NBER Working Papers 10926, National Bureau of Economic Research, Inc.
    8. Patrick Francois & Huw Lloyd-Ellis, 2009. "Schumpeterian Business Cycles with Pro-Cyclical R&D," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 567-591, October.
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