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When do we have borrower or credit volume rationing in competitive credit market with imperfect information?

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  • Kraus, Daniel

Abstract

This paper examines the conditions for credit volume or borrower rationing in a competitive credit market in which the project characteristics are private information of the borrowers. There can only be credit volume rationing if the higher-risk credit applicants have a higher return in the event of a project success than the lower-risk credit applicants. Then the higher-risk borrowers are not rationed and obtain the social efficient credit volume. If the incentive compatibility constraint of the higher risk borrowers is binding, the lower-risk borrowers are credit volume rationed such that the constraint holds as an equation. If credit volume rationing is not sufficient to separate the borrower types, there is additionally a rationing of the low-risk borrowers. If the low-risk borrowers prefer a pooling to a separating contract, then there will not be a Cournot-Nash separating equilibrium, but a Wilson and a Grossmann pooling equilibrium.

Suggested Citation

  • Kraus, Daniel, 2010. "When do we have borrower or credit volume rationing in competitive credit market with imperfect information?," Thuenen-Series of Applied Economic Theory 117, University of Rostock, Institute of Economics.
    • Handle: RePEc:zbw:roswps:117
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    References listed on IDEAS

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    More about this item

    Keywords

    Credit rationing; Credit Size; Loan; Asymmetric Information; Adverse Selection; Non-linear optimization;
    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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