A Re-Examination of Credit Rationing in the Stiglitz and Weiss Model
18 Pages Posted: 7 Nov 2010 Last revised: 7 May 2016
Date Written: May 6, 2016
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: Suggested Citation