Unbounded returns and the possibility of credit rationing: A note on the Stiglitz–Weiss and Arnold–Riley models

Hengheng Lu and Kang Rong

Journal of Mathematical Economics, 2018, vol. 75, issue C, 67-70

Abstract: Arnold and Riley (2009) find that in the credit rationing model of Stiglitz and Weiss (1981), the expected revenue of a lender as a function of the loan rate cannot be globally hump-shaped, and thus credit rationing is hard to explain using the Stiglitz–Weiss model. However, Arnold and Riley base their analysis on the assumption that there is an upper bound of the returns of borrowers’ projects. We find that if unbounded returns of borrowers’ projects are allowed, then a lender’s expected revenue in the Stiglitz–Weiss model can in fact be globally hump-shaped. This also implies that credit rationing (with one equilibrium loan rate) can only arise in markets where the returns from investment are highly volatile.

Keywords: Credit rationing; Unbounded returns; Adverse selection (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:75:y:2018:i:c:p:67-70

DOI: 10.1016/j.jmateco.2017.12.009

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