Abstract
This paper examines the implications for the SME financing market of Application costs that vary between firms, and of imperfect screening of applicants by Banks. Under these conditions 'Discouraged Borrowers' can exist. These are good borrowers who do not apply for a bank loan because they feel they will be rejected. The paper shows that, under a range of assumptions, the scale of discouragement in an economy depends upon the screening error of the banks, the scale of Application costs and the extent to which the bank interest rate differs from that charged by the moneylender. Discouragement is shown to be at a maximum where there is some, but not perfect, information.
References
Berger, A. N. and G. F. Udell, 1992, 'Some Evidence on the Empirical Significance of Credit Rationing', Journal of Political Economy 100(5), 1047–1077.
Buckley, G., 1996, 'Financing the Jua Kali Sector in Kenya, The KREP Juhudi Scheme and Kenya Industrial Estates Informal Sector Programme', in David Hume and Paul Mosley (eds.), Finance Against Poverty, Vol. 2, Routledge, London, pp. 271–332.
de Meza, D. and D. C. Webb, 1987, 'Too Much Investment: A Problem of Asymmetric Information', Quarterly Journal of Economics 102, 281–292.
de Meza and C. Southey, 1996, 'The Borrowers Curse: Optimism, Finance and Entrepreneurship', Economic Journal 106(435), 375–386.
Hume, D. and P. Mosley, 1996, Finance against Poverty, Routledge, London.
Levenson, A. R. and K. L. Willard, 2000, 'Do Firms Get the Financing They Want? Measuring Credit Rationing Experienced by Small Businesses in the US', Small Business Economics 14(2), 83–94.
Petersen, M. A. and R. G. Rajan, 1994, 'The Benefits of Lending Relationships: Evidence from Small Business Data', Journal of Finance 49(1), 3–37.
Raturi, M. and A. V. Swamy, 1999, 'Explaining Ethnic Differentials in Credit Market Outcomes in Zimbabwe', Economic Development and Cultural Change, 585–604.
Stiglitz, J. and A. Weiss, 1981, 'Credit Rationing in Markets with Imperfect Information', American Economic Review 71(3), 393–410.
von Pischke, J. D., Adams Dale and Donald Gordon, 1983, Rural Financial Institutions in Developing Countries, Washington, D.C.: Economic Development Institute of the World Bank.
Author information
Authors and Affiliations
Rights and permissions
About this article
Cite this article
Kon, Y., Storey, D. A Theory of Discouraged Borrowers. Small Business Economics 21, 37–49 (2003). https://doi.org/10.1023/A:1024447603600
Issue Date:
DOI: https://doi.org/10.1023/A:1024447603600