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Department of Business and Management Science, Norwegian School of Economics (NHH) Discussion Papers, Department of Business and Management Science, Norwegian School of Economics (NHH)

No 2010/14:
A Re-examination of Credit Rationing in the Stiglitz and Weiss Model

Xunhua Su ()

Abstract: With a more general setting, we illustrate that credit rationing in the Stiglitz and Weiss (1981) model is sensitive to the ranking of projects. Given that the ranking is according to the mean-preserving-spread, adverse selection and moral hazard cannot co-exist and credit rationing occurs only under extreme conditions. Even if a more general ranking according to the second-order-stochastic-dominance allows for the coexistence of adverse selection and moral hazard, credit rationing implies a take-it-or-leave-it choice for both contract parties and requires that borrowers' collateral amounts are positively correlated with their risk. We argue that these required conditions leave little room for the signicance of credit rationing.

Keywords: Credit rationing; credit market; Stiglitz and Weiss; collateral; (follow links to similar papers)

JEL-Codes: D82; G21; G30; (follow links to similar papers)

22 pages, November 5, 2010, Revised December 31, 2010

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