A Simple Model of Credit Rationing with Information Externalities

Akm Hossain

No 2005-11, Working papers from University of Connecticut, Department of Economics

Abstract: Credit-rationing model similar to Stiglitz and Weiss [1981] is combined with the information externality model of Lang and Nakamura [1993] to examine the properties of mortgage markets characterized by both adverse selection and information externalities. In a credit-rationing model, additional information increases lenders ability to distinguish risks, which leads to increased supply of credit. According to Lang and Nakamura, larger supply of credit leads to additional market activities and therefore, greater information. The combination of these two propositions leads to a general equilibrium model. This paper describes properties of this general equilibrium model. The paper provides another sufficient condition in which credit rationing falls with information. In that, external information improves the accuracy of equity-risk assessments of properties, which reduces credit rationing. Contrary to intuition, this increased accuracy raises the mortgage interest rate. This allows clarifying the trade offs associated with reduced credit rationing and the quality of applicant pool.

Keywords: Credit rationing; Information Externalities; Adverse selection; Mortgage underwriting. (search for similar items in EconPapers)
JEL-codes: C62 R31 R51 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2005-04
New Economics Papers: this item is included in nep-cfn, nep-geo and nep-ure
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Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2005-11

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