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Optimal Credit Rationing in Not-For-Profit Financial Institutions

David Canning (), Clifford W. Jefferson and John E. Spencer

Harvard Institute of Economic Research Working Papers from Harvard - Institute of Economic Research

Abstract: We examine the dynamic optimization problem of Not-For-Profit (NFP) financial institutions that aim to maximize the welfare of members. We characterize the optimal policy and find that it involves credit rationing. Interest rates set by mature NFPs will typically be more favorable to customers than market rates, as "profits" are distributed in the form of interest rate subsidies. Credit rationing is required to prevent these subsidies from distorting the volume of loans from the efficient level. Efficient credit rationing requires knowledge of the consumer surplus generated by each loan, necessitating a close relationship between the NFP and its members.

Date: 1999
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