Components of Credit Rationing
43 Pages Posted: 11 Nov 2019 Last revised: 27 Aug 2020
Date Written: July 7, 2020
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: Suggested Citation