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The Welfare Implications of Costly Monitoring in Credit Market

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  • Hillier, Brian
  • Worrall, Tim

Abstract

Rationing is a pervasive feature of credit markets. It has been suggested that credit rationing represents a suboptimal allocation of resources. In a general equilibrium model of credit rationing with hidden information and costly monitoring we show that if credit is rationed it is suboptimal but that credit should be rationed more tightly. In equilibrium, loan applicants bear average monitoring costs, whereas for efficiency they should bear marginal monitoring costs which are larger because average monitoring costs increase with quantity as extra loans are accompanied by a rise in the interest rate which increases the number of defaults. Copyright 1994 by Royal Economic Society.

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  • Hillier, Brian & Worrall, Tim, 1994. "The Welfare Implications of Costly Monitoring in Credit Market," Economic Journal, Royal Economic Society, vol. 104(423), pages 350-362, March.
    • Handle: RePEc:ecj:econjl:v:104:y:1994:i:423:p:350-62
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    Cited by:

    1. repec:bla:scotjp:v:49:y:2002:i:2:p:162-95 is not listed on IDEAS
    2. Anyangah Joshua, 2012. "Mitigating Judgment Proofness: Information Acquisition vs. Extended Liability," Review of Law & Economics, De Gruyter, vol. 8(3), pages 657-696, December.
    3. Di Giorgio, Giorgio, 2002. "Financial intermediation and capital investment with costly monitoring," International Review of Economics & Finance, Elsevier, vol. 11(1), pages 27-43, April.

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