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A Re-examination of Credit Rationing in the Stiglitz and Weiss Model

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  • Su, Xunhua

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

Abstract

With a more general setting, we illustrate that credit rationing in the Stiglitz and Weiss (1981) model is sensitive to the ranking of projects. Given that the ranking is according to the mean-preserving-spread, adverse selection and moral hazard cannot co-exist and credit rationing occurs only under extreme conditions. Even if a more general ranking according to the second-order-stochastic-dominance allows for the coexistence of adverse selection and moral hazard, credit rationing implies a take-it-or-leave-it choice for both contract parties and requires that borrowers' collateral amounts are positively correlated with their risk. We argue that these required conditions leave little room for the signicance of credit rationing.

Suggested Citation

  • Su, Xunhua, 2010. "A Re-examination of Credit Rationing in the Stiglitz and Weiss Model," Discussion Papers 2010/14, Norwegian School of Economics, Department of Business and Management Science, revised 31 Dec 2010.
    • Handle: RePEc:hhs:nhhfms:2010_014
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    1. Berger, Allen N. & Scott Frame, W. & Ioannidou, Vasso, 2011. "Tests of ex ante versus ex post theories of collateral using private and public information," Journal of Financial Economics, Elsevier, vol. 100(1), pages 85-97, April.
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    3. Giuseppe Coco, 2000. "On the Use of Collateral," Journal of Economic Surveys, Wiley Blackwell, vol. 14(2), pages 191-214, April.
    4. Berger, Allen N. & Espinosa-Vega, Marco A. & Frame, W. Scott & Miller, Nathan H., 2011. "Why do borrowers pledge collateral? New empirical evidence on the role of asymmetric information," Journal of Financial Intermediation, Elsevier, vol. 20(1), pages 55-70, January.
    5. repec:exe:wpaper:97/15 is not listed on IDEAS
    6. Stiglitz, Joseph E & Weiss, Andrew, 1992. "Asymmetric Information in Credit Markets and Its Implications for Macro-economics," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 694-724, October.
    7. Bengt Holmstrom & Jean Tirole, 1997. "Financial Intermediation, Loanable Funds, and The Real Sector," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 663-691.
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    9. Tensie Steijvers & Wim Voordeckers, 2009. "Collateral And Credit Rationing: A Review Of Recent Empirical Studies As A Guide For Future Research," Journal of Economic Surveys, Wiley Blackwell, vol. 23(5), pages 924-946, December.
    10. Lensink, Robert & Sterken, Elmer, 2002. "The Option to Wait to Invest and Equilibrium Credit Rationing," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 34(1), pages 221-225, February.
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    12. David de Meza & David C. Webb, 1987. "Too Much Investment: A Problem of Asymmetric Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 102(2), pages 281-292.
    13. Coco, G., 1997. "Credit Rationing and the Welfare Gain from Usury Laws," Discussion Papers 9715, University of Exeter, Department of Economics.
    14. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-855, September.
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    Cited by:

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    2. Philippe Adair & Mohamed Adaskou, 2020. "Credit Rationing and Mature French SMEs: A Disequilibrium Model," World Journal of Applied Economics, WERI-World Economic Research Institute, vol. 6(1), pages 55-72, June.
    3. Sandar Win, 2018. "What are the possible future research directions for bank’s credit risk assessment research? A systematic review of literature," International Economics and Economic Policy, Springer, vol. 15(4), pages 743-759, October.
    4. Kilian Rieder & Michael Anson & David Bholat & Miao Kang & Ryland Thomas, 2018. "Frosted glass or raised eyebrow? Testing the Bank of England’s discount window policies during the crisis of 1847," Working Papers 18020, Economic History Society.
    5. Miglo, Anton, 2022. "Theories of financing for entrepreneurial firms: a review," MPRA Paper 115835, University Library of Munich, Germany.
    6. Anson, Mike & Bholat, David & Kang, Miao & Rieder, Kilian & Thomas, Ryland, 2019. "The Bank of England and central bank credit rationing during the crisis of 1847: frosted glass or raised eyebrows?," Bank of England working papers 794, Bank of England.
    7. Beyhaghi, Mehdi & Firoozi, Fathali & Jalilvand, Abol & Samarbakhsh, Laleh, 2020. "Components of credit rationing," Journal of Financial Stability, Elsevier, vol. 50(C).
    8. Niinimäki, Juha-Pekka, 2018. "Collateral in credit rationing in markets with asymmetric information," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 97-102.
    9. Philippe Adair & Mohamed Adaskou, 2019. "Credit rationing and French mature SMEs: A disequilibrium model (2002-2010)," Erudite Working Paper 2019-02, Erudite.

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    More about this item

    Keywords

    Credit rationing; credit market; Stiglitz and Weiss; 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
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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