A Symmetric-Information Model of Credit Rationing

Abstract

We develop a model of credit rationing that does not rely on asymmetric information or an exogenous constraint on the supply of loanable funds. This implies that rationing equilibria arise under more general condition, and therefore may be more prevalent, than commonly believed. The model illustrates how credit rationing can occur as the result of a portfolio effect (such as diversification or a regulatory cost) that is not directly related to the creditworthiness of individual applicants. Notably, rationing occurs in our model only at the margin. Thus, being rationed is a signal of low creditworthiness to other lenders. The model also offers an explanation for why banks may offer a pooling loan rate to all borrowers, even when differences in those borrowers' credit risk are observable.

JEL Classification: G20