Single-Name Credit Risk, Portfolio Risk, and Credit Rationing

Lutz Arnold (lutz.arnold@wiwi.uni-regensburg.de), Johannes Reeder and Stefanie Trepl

No 448, University of Regensburg Working Papers in Business, Economics and Management Information Systems from University of Regensburg, Department of Economics

Abstract: This paper introduces non-diversifiable risk in the Stiglitz-Weiss adverse selection model, so that an increase in the average riskiness of the borrower pool causes higher portfolio risk. This opens up the possibility of equilibrium credit rationing. Comparative statics analysis shows that an increase in risk aversion turns a two-price equilibrium into a rationing equilibrium. A two-price equilibrium is more inefficient than a rationing equilibrium, and a usury law that rules out the higher of the two interest rates can be welfare-improving. Contrary to the common result, the equilibrium may be characterized by over-investment.

Keywords: asymmetric information; credit rationing (search for similar items in EconPapers)
JEL-codes: D82 E51 G21 (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-ban, nep-cta and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Single-name Credit Risk, Portfolio Risk and Credit Rationing (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bay:rdwiwi:17365

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