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

No 2010/14, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: With a more general setting, we illustrate that credit rationing in the Stiglitz and Weiss (1981) model is sensitive to the ranking of projects. Given that the ranking is according to the mean-preserving-spread, adverse selection and moral hazard cannot co-exist and credit rationing occurs only under extreme conditions. Even if a more general ranking according to the second-order-stochastic-dominance allows for the coexistence of adverse selection and moral hazard, credit rationing implies a take-it-or-leave-it choice for both contract parties and requires that borrowers' collateral amounts are positively correlated with their risk. We argue that these required conditions leave little room for the signicance of credit rationing.

Keywords: Credit rationing; credit market; Stiglitz and Weiss; collateral (search for similar items in EconPapers)
JEL-codes: D82 G21 G30 (search for similar items in EconPapers)
Pages: 22 pages
Date: 2010-11-05, Revised 2010-12-31
New Economics Papers: this item is included in nep-ban and nep-cta
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Journal Article: A Reexamination of Credit Rationing in the Stiglitz and Weiss Model (2017)
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