On the existence of credit rationing and screening with loan size in competitive markets with imperfect information
Although credit rationing has been a stylized fact since the groundbreaking papers by Stiglitz and Weiss (1981, hereinafter S-W) and Besanko and Thakor (1987a, hereinafter B-T), Arnold and Riley (2009) note that credit rationing is unlikely in the S-W model, and Clemenz (1993) shows that it does not exist in the B-T model. In this chapter, I explain why credit rationing, more specifically rationing of loan applicants, does exist in a competitive market with imperfect information, and occurs only for low-risk loan applicants. In cases of indivisible investment technologies, low-risk applicants are rationed. In cases of divisible investment technologies, rationing of loan size is restricted to rationing of loan applicants. In the event that the difference in the marginal return between the investment technologies is sufficiently small relative to the difference in their riskiness, rationing of loan size alone yields high opportunity costs; in addition, low-risk loan applicants are rationed in this case.
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- Gerhard CLEMENZ, 1990.
"A Note on the Non-existence of a Rationing Equilibrium in the Besanko-Thakor-Model,"
Vienna Economics Papers
vie9001, University of Vienna, Department of Economics.
- Clemenz, Gerhard, 1993. "A Note on the Nonexistence of a Rationing Equilibrium in the Besanko-Thakor Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 727-37, August.
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