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American Economic Review: Vol. 99 No. 5 (December 2009)

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On the Possibility of Credit Rationing in the Stiglitz-Weiss Model

Article Citation

Arnold, Lutz G., and John G. Riley. 2009. "On the Possibility of Credit Rationing in the Stiglitz-Weiss Model." American Economic Review, 99(5): 2012-21.

DOI: 10.1257/aer.99.5.2012

Abstract

Contrary to what is usually assumed, the expected revenue for lenders as a function of the loan rate cannot be globally hump-shaped in the Stiglitz-Weiss (1981) adverse selection model with a continuum of types. This has important implications. First, if there is credit rationing, there must be at least two equilibrium loan rates. Second, while at the low rate loans are rationed, all those applicants willing to pay the high rate are then served. Numerical analysis shows that unless the joint distribution of risk class and output is rather special, the two loan rate outcome with rationing is unlikely. (JEL D82, G21)

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Authors

Arnold, Lutz G. (U Regensburg)
Riley, John G. (UCLA)

JEL Classifications

D82: Asymmetric and Private Information
G21: Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages


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