The Welfare Implications of Costly Monitoring in Credit Market

Brian Hillier and Tim Worrall ()

Economic Journal, 1994, vol. 104, issue 423, pages 350-62

Abstract: Rationing is a pervasive feature of credit markets. It has been suggested that credit rationing represents a suboptimal allocation of resources. In a general equilibrium model of credit rationing with hidden information and costly monitoring we show that if credit is rationed it is suboptimal but that credit should be rationed more tightly. In equilibrium, loan applicants bear average monitoring costs, whereas for efficiency they should bear marginal monitoring costs which are larger because average monitoring costs increase with quantity as extra loans are accompanied by a rise in the interest rate which increases the number of defaults. Copyright 1994 by Royal Economic Society.

Date: 1994

Downloads: (external link)
http://links.jstor.org/sici?sici=0013-0133%2819940 ... 0.CO%3B2-5&origin=bc full text (application/pdf)
Access to full text is restricted to JSTOR subscribers. See http://www.jstor.org for details.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:ecj:econjl:v:104:y:1994:i:423:p:350-62

Ordering information: This journal article can be ordered from
http://www.blackwell ... al.asp?ref=0013-0133

Access Statistics for this article

Economic Journal is edited by Antonio Ciccone, Leonardo Felli, Steve Machin, Andrew Scott, Steve Pischke and David Myatt

More articles in Economic Journal from Royal Economic Society
Contact information at EDIRC.
Series data maintained by Christopher F. Baum ().