A Reexamination of Credit Rationing in the Stiglitz and Weiss Model | Zendy

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A Reexamination of Credit Rationing in the Stiglitz and Weiss Model

Author(s) -

SU XUNHUA,

ZHANG LI

Publication year - 2017

Publication title -

journal of money, credit and banking

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 1.763

H-Index - 108

eISSN - 1538-4616

pISSN - 0022-2879

DOI - 10.1111/jmcb.12406

Subject(s) - credit rationing , adverse selection , moral hazard , rationing , dominance (genetics) , stochastic dominance , economics , order (exchange) , actuarial science , microeconomics , interest rate , monetary economics , finance , incentive , econometrics , biology , health care , biochemistry , gene , economic growth

We reexamine Stiglitz and Weiss (1981) credit rationing by simultaneously considering adverse selection and moral hazard. If returns of the projects are ranked by first‐order stochastic dominance, neither adverse selection nor moral hazard exists. If the projects have equalized expected returns, moral hazard does not exist, and credit rationing due to adverse selection occurs under extreme conditions. If the projects are ranked by second‐order stochastic dominance (SSD), adverse selection and moral hazard may coexist, logically restoring credit rationing, but SSD imposes strict limitations on lenders’ ability to classify borrowers. In general, our results do not support significance of credit rationing.

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