A Reexamination of Credit Rationing in the Stiglitz and Weiss Model

Xunhua Su and Li Zhang

Journal of Money, Credit and Banking, 2017, vol. 49, issue 5, 1059-1072

Abstract: We reexamine Stiglitz and Weiss (1981) credit rationing by simultaneously considering adverse selection and moral hazard. If returns of the projects are ranked by first‐order stochastic dominance, neither adverse selection nor moral hazard exists. If the projects have equalized expected returns, moral hazard does not exist, and credit rationing due to adverse selection occurs under extreme conditions. If the projects are ranked by second‐order stochastic dominance (SSD), adverse selection and moral hazard may coexist, logically restoring credit rationing, but SSD imposes strict limitations on lenders’ ability to classify borrowers. In general, our results do not support significance of credit rationing.

Date: 2017
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https://doi.org/10.1111/jmcb.12406

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Working Paper: A Re-examination of Credit Rationing in the Stiglitz and Weiss Model (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:49:y:2017:i:5:p:1059-1072

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