Premium
Optimal credit rationing in not‐for‐profit financial institutions*
Author(s) -
Canning David,
Jefferson Clifford W.,
Spencer John E.
Publication year - 2003
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/1468-2354.t01-1-00069
Subject(s) - credit rationing , rationing , subsidy , loan , economics , profit (economics) , microeconomics , interest rate , economic surplus , rate of profit , finance , business , monetary economics , welfare , market economy , health care , economic growth
We examine the dynamic optimization problem for not‐for‐profit financial institutions (NFPs) that maximize consumer surplus, not profits. We characterize the optimal dynamic policy and find that it involves credit rationing. Interest rates set by mature NFPs will typically be more favorable to customers than market rates, as any surplus is distributed in the form of interest rate subsidies, with credit rationing being required to prevent these subsidies from distorting loan volumes from their optimal levels. Rationing overcomes a fundamental problem in NFPs; it allows them to distribute the surplus without distorting the volume of activity from the efficient level.