Credit Rationing: Something's Gotta Give

David de Meza and David C. Webb

Economica, 2006, vol. 73, issue 292, pages 563-578

Abstract: 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. Copyright (c) The London School of Economics and Political Science 2006.

Date: 2006

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