Components of Credit Rationing

43 Pages Posted: 11 Nov 2019 Last revised: 27 Aug 2020

See all articles by Mehdi Beyhaghi

Mehdi Beyhaghi

Federal Reserve Banks - Federal Reserve Bank of Richmond

Fathali Firoozi

University of Texas at San Antonio - College of Business - Department of Economics

Abolhassan Jalilvand

Loyola University of Chicago

Laleh Samarbakhsh

Ryerson University - Ted Rogers School of Management

Date Written: July 7, 2020

Abstract

Credit rationing by lending institutions has been the subject of much research in recent decades. Although there are some empirical indications, there is little theoretical justification about how various forms of credit rationing manifest themselves in credit markets. Understanding how these forms emerge in the market is particularly important for regulators in charge of monetary policy who play a crucial role in attaining economic and financial stability during crises and pandemics. This study first offers a theoretical decomposition of credit rationing by showing that three forms of equilibrium credit rationing can exist in the presence of contract heterogeneity. It then provides empirical evidence on each of the three rationing forms using micro-level data on small- and medium-sized enterprises collected by the European Central Bank over the period 2009-2019.

Keywords: asymmetric information; credit risk; incentive compatibility; optimal contracts

JEL Classification: D82, G21, G32

Suggested Citation

Beyhaghi, Mehdi and Firoozi, Fathali and Jalilvand, Abolhassan and Samarbakhsh, Laleh, Components of Credit Rationing (July 7, 2020). Journal of Financial Stability, Vol. 50, No. 100762, 2020, Available at SSRN: https://ssrn.com/abstract=3478832 or http://dx.doi.org/10.2139/ssrn.3478832

Mehdi Beyhaghi

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Fathali Firoozi

University of Texas at San Antonio - College of Business - Department of Economics ( email )

6900 North Loop 1604 West
San Antonio, TX 78249
United States

Abolhassan Jalilvand (Contact Author)

Loyola University of Chicago ( email )

25 East Pearson Street
Chicago, IL 60611
United States

Laleh Samarbakhsh

Ryerson University - Ted Rogers School of Management ( email )

Toronto, ON
Canada

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