Premium
Credit Rationing: Something's Gotta Give
Author(s) -
DE MEZA DAVID,
WEBB DAVID C.
Publication year - 2006
Publication title -
economica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.532
H-Index - 65
eISSN - 1468-0335
pISSN - 0013-0427
DOI - 10.1111/j.1468-0335.2006.00533.x
Subject(s) - credit rationing , rationing , liberian dollar , incentive , economics , loan , consumption (sociology) , microeconomics , monetary economics , finance , interest rate , economic growth , health care , social science , sociology
Equilibrium credit rationing, in the sense of Stiglitz and Weiss, is shown to imply that the marginal cost of funds to the borrower is infinite. So entrepreneurs have an overwhelming incentive to cut their loans by a dollar and so avoid rationing. Ways of doing this include scaling down the project, decreasing consumption, or delaying the project to accumulate more savings. Credit rationing emerges for indivisible projects only when delay causes sufficient deterioration. Borrowers then apply for funds at the first opportunity, but, counterfactually, once denied a loan, they never reapply. Conditions for credit rationing are stringent indeed.