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Banks as Social Accountants and Screening Devices for the Allocation of Credit

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  • Joseph E. Stiglitz
  • Andrew Weiss

Abstract

This paper presents and alternative perspective on the role of banks. We emphasize the ways in which banks act as social accountants and screening devices. In this view monetary disturbances have their effects through the disturbances which they induce in society's accounting system and in the mechanisms by which it is ascertained who is credit worthy. Because of asymmetric information, giving rise to credit rationing, interest rates do not play the simple allocative role ascribed by the conventional paradigm, and as a result the equilibrating forces provided by market mechanisms may be weak or virtually absent. The paper provides a critique of the transactions based approach to monetary theory, and sketches a general equilibrium formulation of the theory. The paper traces out some of the policy implications of the theory. We show that certain financial innovations, such as allowing for the more rapid recording of transactions, may actually be welfare reducing.

Suggested Citation

  • Joseph E. Stiglitz & Andrew Weiss, 1988. "Banks as Social Accountants and Screening Devices for the Allocation of Credit," NBER Working Papers 2710, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2710
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    References listed on IDEAS

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    1. Jaffee, Dwight M & Modigliani, Franco, 1969. "A Theory and Test of Credit Rationing," American Economic Review, American Economic Association, vol. 59(5), pages 850-872, December.
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    5. Jonathan Eaton & Mark Gersovitz & Joseph E. Stiglitz, 1991. "The Pure Theory of Country Risk," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 391-435, National Bureau of Economic Research, Inc.
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    8. Joseph E. Stiglitz, 1974. "Incentives and Risk Sharing in Sharecropping," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 41(2), pages 219-255.
    9. Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
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