Moral hazard contracting and credit rationing in opaque credit markets

Xin He

International Journal of Computational Economics and Econometrics, 2015, vol. 5, issue 1, 12-34

Abstract: We make a first step in the literature to analyse a hybrid model of credit rationing with simultaneous presence of adverse selection and moral hazard. Motivated by the observation that credit markets in less-developed countries are rather opaque owing to the lack of necessary institutions to facilitate information sharing among lenders, we re-examine the issue of credit rationing in such an environment. For a range of different parameter values, we fully characterise the subgame perfect equilibria (SPE) of the loan contracting game. Under certain parameter values, there is type-II credit rationing for some borrowers and credit forcing for others. Credit forcing is shown to be efficient in a constrained sense. The results are contrasted with those in DeMeza and Webb (1992).

Keywords: credit rationing; opaque credit markets; contract; moral hazard; adverse selection; information sharing; subgame perfect equilibria; SPE; loan contracting game; credit forcing. (search for similar items in EconPapers)
Date: 2015
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