A Simple Model of Credit Rationing with Information Externalities
Credit-rationing model similar to Stiglitz and Weiss  is combined with the information externality model of Lang and Nakamura  to examine the properties of mortgage markets characterized by both adverse selection and information externalities. In a credit-rationing model, additional information increases lenders ability to distinguish risks, which leads to increased supply of credit. According to Lang and Nakamura, larger supply of credit leads to additional market activities and therefore, greater information. The combination of these two propositions leads to a general equilibrium model. This paper describes properties of this general equilibrium model. The paper provides another sufficient condition in which credit rationing falls with information. In that, external information improves the accuracy of equity-risk assessments of properties, which reduces credit rationing. Contrary to intuition, this increased accuracy raises the mortgage interest rate. This allows clarifying the trade offs associated with reduced credit rationing and the quality of applicant pool.
|Date of creation:||Apr 2005|
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- Stephen Ross & AKM Rezaul Hossain, 2004. "A Direct Test of the Lang and Nakamura Hypothesis of Information Externalities over Space," Econometric Society 2004 North American Summer Meetings 398, Econometric Society.
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