 Market Equilibrium with Limited Liability: The Plausibility of Credit Rationing Due to Adverse SelectionMichael Teit Nielsen
No 89-23, Discussion Papers from University of Copenhagen. Department of Economics Abstract: A model is set up in which firms borrow their entire working capital to finance the production of a good which is sold in a market with a random demand side. Limited liability may prevent a rational expectations equilibrium to exist at a given rate of interest, or it may be the cause of multiplicity of such equilibria. Secondly, if the banks give loans to two different industries there may be adverse selection effects, paving the way for credit rationing as in the model of Stiglitz and Weiss (1981), but it seems that such results occur only for somewhat extreme parameter values. Finally, it is shown that if those conditions are satisfied, the interest rate set by the banks may in some cases move counter-cyclically, but this result seems most plausible when it is the safe sector which is the most sensitive to changes in over-all demand, rather than the risky sector, as is the case in the Stiglitz-Weiss model. Keywords: limited liability; rational expectations; adverse selection; credit rationing (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:kud:kuiedp:8923 Access Statistics for this paper More papers in Discussion Papers from University of Copenhagen. Department of Economics Oester Farimagsgade 5, Building 26, DK-1353 Copenhagen K., Denmark. Contact information at EDIRC. |
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