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Credit Rationing and Government Loan Programs: A Welfare Analysis
Author(s) -
Smith Bruce D.,
Stutzer Michael J.
Publication year - 1989
Publication title -
real estate economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.064
H-Index - 61
eISSN - 1540-6229
pISSN - 1080-8620
DOI - 10.1111/1540-6229.00483
Subject(s) - credit rationing , loan , inefficiency , rationing , government (linguistics) , economics , incentive , welfare , participation loan , non conforming loan , non performing loan , actuarial science , business , finance , public economics , microeconomics , interest rate , economic growth , market economy , health care , linguistics , philosophy
Asymmetric information about borrower default probabilities may lead to inefficient credit rationing of low‐risk borrowers in otherwise competitive markets. In a simple model having these properties, we show that some types of government loan programs, such as loan guarantees issued through lenders, might improve economic efficiency. But the incentive for high‐risk borrowers to misrepresent their loan quality is worsened by other government loan programs, notably those that try to target aid directly to rationed borrowers. As such, cost‐effective programs may increase inefficiency. This surprising result highlights the need to conduct model‐specific policy analyses, as opposed to analyses based on model‐free performance indicators.