Moral Hazard and Equilibrium Credit Rationing: An Overview of the Issues
One of the more intriguing puzzles in microeconomics is presented by the phenomenon of credit rationing. If funds are so scarce as to require rationing, why do lenders not raise the interest that they demand? We survey recent developments that seek to explain this phenomenon by appealing to incentive problems in the relation between the borrower and the lender. A simple example, due to Stiglitz and Weiss, shows that under certain circumstances, lenders will not use their bargaining power to raise interest rates because the adverse incentive effects of such a move outweigh any direct effect on the lender’s payoffs. To examine the robustness of this argument, we discuss how the analysis is affected by the use of collateral, variations in loan size and investment, or alternative forms of the finance contract. Finally, we analyse the relation between the credit-rationing problem and the general theory of optimal incentive schemes under imperfect information.
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