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

Su, Xunhua; Zhang, Li

doi:10.2139/ssrn.1703428

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

Journal of Money, Credit and Banking, Volume 49, Issue 5, August 2017, Pages 1059-1072

18 Pages Posted: 7 Nov 2010 Last revised: 26 May 2020

See all articles by Xunhua Su

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: 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, Volume 49, Issue 5, August 2017, Pages 1059-1072, Available at SSRN: https://ssrn.com/abstract=1703428 or http://dx.doi.org/10.2139/ssrn.1703428