A Re-Examination of Credit Rationing in the Stiglitz and Weiss Model

18 Pages Posted: 7 Nov 2010 Last revised: 7 May 2016

See all articles by Xunhua Su

Xunhua Su

Norwegian School of Economics (NHH)

Li Zhang

Shanghai Pudong Science and Technology Financial Services Association

Date Written: May 6, 2016

Abstract

We reexamine Stiglitz Weiss (1981) credit rationing by simultaneously considering adverse selection and moral hazard. If returns of the projects are ranked by first-order stochastic dominance, neither adverse selection nor moral hazard exists. If the projects have equalized expected returns, moral hazard does not exist, and credit rationing due to adverse selection occurs under extreme conditions. If the projects are ranked by second-order stochastic dominance (SSD), adverse selection and moral hazard may coexist, logically restoring credit rationing, but SSD imposes strict limitations on lenders’ ability to classify borrowers. In general, our results do not support significance of credit rationing.

Keywords: Credit rationing, credit market, Stiglitz and Weiss, collateral

JEL Classification: D82, G21, G30

Suggested Citation

Su, Xunhua and Zhang, Li, A Re-Examination of Credit Rationing in the Stiglitz and Weiss Model (May 6, 2016). Journal of Money, Credit, and Banking, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1703428 or http://dx.doi.org/10.2139/ssrn.1703428

Xunhua Su (Contact Author)

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

HOME PAGE: http://sites.google.com/site/xunhuasu/research

Li Zhang

Shanghai Pudong Science and Technology Financial Services Association ( email )

Pudong
Shanghai
China

Register to save articles to
your library

Register

Paper statistics

Downloads
704
rank
34,505
Abstract Views
3,521
PlumX Metrics