Credit Risk, Credit Rationing, and the Role of Banks: The Case of Risk Averse Lenders

Thilo Pausch

No 271, Discussion Paper Series from Universitaet Augsburg, Institute for Economics

Abstract: The standard situation of ex post information asymmetry between borrowers and lenders is extended by risk aversion and heterogenous levels of reservation utility of lenders. In a situation of direct contracting optimal incentive compatible contracts are valuable for both, borrowers and lenders. However, there may appear credit rationing as a consequence of borrowers optimal decision making. Introducing a bank into the market increases total wealth due to the appearance of a portfolio effect in the sense of first order stochastic dominance. It can be shown that this effect may even reduce the problem of credit rationing provided it is sufficiently strong.

Keywords: risk aversion; costly state verification; credit rationing; bank (search for similar items in EconPapers)
JEL-codes: D82 G21 L22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn, nep-ent, nep-fin and nep-pke
Date: 2005-02
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