Optimal Credit Rationing in Not-For-Profit Financial Institutions

David Canning, Clifford W. Jefferson and John E. Spencer
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Clifford W. Jefferson: Queen's University of Belfast, Northern Ireland, U.K.
John E. Spencer: Queen's University of Belfast, Northern Ireland, U.K.

International Economic Review, 2003, vol. 44, issue 1, 243-261

Abstract: We examine the dynamic optimization problem for not-for-profit financial institutions (NFPs) that maximize consumer surplus, not profits. We characterize the optimal dynamic 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 any surplus is distributed in the form of interest rate subsidies, with credit rationing being required to prevent these subsidies from distorting loan volumes from their optimal levels. Rationing overcomes a fundamental problem in NFPs; it allows them to distribute the surplus without distorting the volume of activity from the efficient level. Copyright 2003 By The Economics Department Of The University Of Pennsylvania And Osaka University Institute Of Social And Economic Research Association

Date: 2003
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Working Paper: Optimal Credit Rationing in Not-For-Profit Financial Institutions (1999)
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