Institutions, Credit rationing and housing development

Fernando Garcia and Fernanda Brollo ()

No 87, Econometric Society 2004 Latin American Meetings from Econometric Society

Abstract: One of the basic principles that allow a smooth operation of the markets is the equilibrium between supply and demand. According to this principle, when demand exceeds supply, the price mechanism will try to bring the system back into equilibrium. When this thinking is applied to the housing market, it leads to the conclusion that any inequality in housing supply or demand is transitory. Nonetheless, the fact that a considerable share of the population live in precarious homes for generations seems to speak against the virtues of market mechanisms in the resolution of housing disequilibria. Stiglitz and Weiss (1981) argue that in the face of asymmetric information, under some conditions the equilibrium of the credit market can be marked by rationing. Asymmetric information – working through the effects of adverse selection and of incentive – has impacts on the return function of bank loans, which leads to interest rates used in housing loans to be different from those that balance supply and demand for credit, causing credit rationing. Literature of the New Institutional Economics (NIE) in turn points out the fact that institutions can reduce the degree of uncertainty by lessening the effects of asymmetric information. Regarding the housing market, the degree of property rights, as well as the mortgage institution which acts as a contract enforcement tool, provide the credit market with information on the quality of the borrower and thus broaden the social scope of this market. The purpose of this article is to understand how the equilibrium in the housing market is influenced by credit rationing and to what extend institutional development affects this scarcity and the interest rates of housing loans. The model developed in this article, which combines the tradition of dynamic models of housing investment with the premises of the New Institutional Economics and the considerations of Stiglitz and Weiss (1981) and (1992) on rationing in the credit market, allows us to identify the role of institutions on housing development.

Keywords: Asymmetric information; Rationed credit market; Property rights; Mortgage foreclosure costs; Housing development (search for similar items in EconPapers)
JEL-codes: D23 G21 R21 R31 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-geo
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