Table Of ContentLLeeccttuurree NNootteess iinn EEccoonnoommiiccss aanndd MMaatthheemmaattiiccaall SSyysstteemmss
FFoorr iinnffoorrmmaattiioonn aabboouutt VVoollss.. 11--112288,, pplleeaassee ccoonnttaacctt yyoouurr bbooookksseelllleerr oorr SSpprriinnggeerr--VVeerrllaagg
VVooll.. 112299:: HH..--JJ.. LLOOtthhii.. KKoommpplleemmeennttaarriittllllttss--uunndd FFiixxppuunnkkttaallggoorriitthhmmeenn iinn VVooll.. 115577:: OOppttiimmiizzaattiioonn aanndd OOppeerraattiioonnss RReesseeaarrcchh.. PPrroocceeeeddiinnggss 11997777..
ddeerr mmaatthheemmaattiisscchheenn PPrrooggrraammmmiieerruunngg.. SSppiieeiitthheeoorriiee uunndd OOkkoonnoommiiee.. EEddiitteedd bbyy RR.. HHeennnn,, BB.. KKoorrttee,, aanndd WW.. OOeettttllii.. VVII,, 227700 ppaaggeess.. 11997788..
VVIIII.. 114466 SSeeiitteenn.. 11997766..
VVooll.. 115588:: LL.. JJ.. CChheerreennee,, SSeett VVaalluueedd DDyynnaammiiccaall SSyysstteemmss aanndd EEccoonnoommiicc
VVooll.. 113300:: MMuullttiippllee CCrriitteerriiaa DDeecciissiioonn MMaakkiinn99,, JJoouuyy--eenn--JJoossaass,, FFrraannccee.. FFllooww.. VVIIIIII.. 8833 ppaaggeess.. 11997788..
PPrroocceeeeddiinnggss II 997766.. EEddiitteedd bbyy HH.. TThhiirriieezz aanndd SS.. ZZiioonnttss.. VVII.. 440099 ppaaggeess.. VVooll.. 115599:: SSoommee AAssppeeccttss ooff tthhee FFoouunnddaattiioonnss ooff GGeenneerraall EEqquuiilliibbrriiuumm
11997766.. TThheeoorryy:: TThhee PPoosstthhuummoouuss PPaappeerrss ooff PPeetteerr JJ.. KKaallmmaann.. EEddiitteedd bbyy JJ.. GGrreeeenn..
VVooll.. 113311:: MMaatthheemmaattiiccaall SSyysstteemmss TThheeoorryy.. PPrroocceeeeddiinnggss 11997766.. EEddiitteedd VVII,, 116677 ppaaggeess.. 11997788..
bbyy GG.. MMaarrcchheessiinnii aanndd SS.. KK.. MMiitttteerr.. XX,, 440088 ppaaggeess.. 11997766..
VVooll.. 116600:: IInntteeggeerr PPrrooggrraammmmiinngg aanndd RReellaatteedd AArreeaass.. AA CCllaassssiiffiieedd
VVooll.. 113322:: UU.. HH.. FFuunnkkee,, MMaatthheemmaattiiccaall MMooddeellss iinn MMaarrkkeettiinngg.. AA CCoolllleecc BBiibblliiooggrraapphhyy.. EEddiitteedd bbyy DD.. HHaauussmmaannnn.. XXIIVV,, 331144 ppaaggeess.. 11997788..
ttiioonn ooff AAbbssttrraaccttss.. XXXX,, 551144 ppaaggeess.. 11997766..
VVooll.. 116611:: MM.. JJ.. BBeecckkmmaannnn,, RRaannkk iinn OOrrggaanniizzaattiioonnss.. VVIIIIII,, 116644 ppaaggeess.. 11997788..
VVooll.. 113333:: WWaarrssaaww FFaallll SSeemmiinnaarrss iinn MMaatthheemmaattiiccaall EEccoonnoommiiccss 11997766..
EEddiitteedd bbyy MM.. WW.. LLooss,, JJ.. LLooss,, aanndd AA WWiieecczzoorreekk.. VV.. 115599 ppaaggeess.. 11997766.. VVooll.. 116622:: RReecceenntt DDeevveellooppmmeennttss iinn VVaarriiaabbllee SSttrruuccttuurree SSyysstteemmss,, EEccoo
nnoommiiccss aanndd BBiioollooggyy.. PPrroocceeeeddiinnggss 11997777.. EEddiitteedd bbyy RR.. RR.. MMoohhlleerr aanndd
VVooll.. 113344:: CCoommppuuttiinngg MMeetthhooddss iinn AApppplliieedd SScciieenncceess aanndd EEnnggiinneeeerriinngg..
AA.. RRuubbeerrttii.. VVII,, 332266 ppaaggeess.. 11997788..
PPrroocceeeeddiinnggss 11997755.. VVIIIIII,, 339900 ppaaggeess.. 11997766..
VVooll.. 113355:: HH.. HHaaggaa,, AA DDiisseeqquuiilliibbrriiuumm -- EEqquuiillllbbJJiiuumm MMooddeell wwiitthh MMoonneeyy VVooll.. 116633:: GG.. FFaannddeell,, OOppttiimmaallee EEnnttsscchheeiidduunnggeenn iinn OOrrggaanniissaattiioonneenn..
aanndd BBoonnddss.. AA KKeeyynneessiiaann -- WWaallrraassiiaann SSyynntthheessIIss.. VVII,, 111199 ppaaggeess..llgg7766.. VVII,, 114433 SSeeiitteenn.. 11997799..
VVooll.. 113366:: EE.. KKoofflleerr uunndd GG.. MMeennggeess,, EEnnttsscchheeiidduunnggeenn bbeeii uunnvvoollllssttllllnnddiiggeerr VVooll.. 116644:: CC.. LL.. HHwwaanngg aanndd AA SS..''MM.. MMaassuudd,, MMuullttiippllee OObbjjeeccttiivvee DDee
IInnffoorrmmaattiioonn.. XXIIII,, 336677 SSeeiitteenn.. 11997766.. cciissiioonn MMaakkiinngg -- MMeetthhooddss aanndd AApppplliiccaattiioonnss.. AA SSttaattee--ooff--tthhee--AArrtt SSuurrvveeyy..
VVooll.. 113377:: RR.. WWeettss,, GGrruunnddllaaggeenn KKoonnvveexxeerr OOppttiimmlleerruunngg.. VVII,, 114466 SSeelltteenn.. XXIIII,, 335511 ppaaggeess.. 11997799..
11997766..
VVooll.. 116655:: AA MMaarraavvaallll,, IIddeennttiiffiiccaattiioonn iinn DDyynnaammiicc SShhoocckk--EErrrroorr MMooddeellss..
VVooll.. 113388:: KK OOkkuugguucchhii,, EExxppeeccttaattiioonnss aanndd SSttaabbiilliittyy iinn OOlliiggooppoollyy MMooddeellss.. VVIIIIII,, 115588 ppaaggeess.. 11997799..
VVII,, 110033 ppaaggeess.. 11997766..
VVooll.. 116666:: RR.. CCuunniinngghhaammee--GGrreeeenn,, MMiinniimmaaxx AAllggeebbrraa.. XXII,, 225588 ppaaggeess..
VVooll.. 113399:: PPrroodduuccttiioonn TThheeoorryy aanndd IIttss AApppplliiccaattiioonnss.. PPrroocceeeeddiinnggss.. EEddiitteedd 11997799..
bbyy HH.. AAllbbaacchh aanndd GG.. BBeerrggeennddaahhll.. VVIIIIII,, 119933 ppaaggeess.. 11997777..
VVooll.. 116677:: MM.. FFaabbeerr,, IInnttrroodduuccttiioonn ttoo MMooddeerrnn AAuussttrriiaann CCaappiittaall TThheeoorryy..
VVooll.. 114400:: WW.. EEiicchhhhoorrnn aanndd JJ.. VVooeelllleerr,, TThheeoorryy ooff tthhee PPrriiccee IInnddeexx.. XX,, 119966 ppaaggeess.. 11997799..
FFiisshheerr''ss TTeesstt AApppprrooaacchh aanndd GGeenneerraalliizzaattiioonnss.. VVIIII,, 9955 ppaaggeess.. 11997766..
VVooll.. 116688:: CCoonnvveexx AAnnaallyyssiiss aanndd MMaatthheemmaattiiccaall EEccoonnoommiiccss.. PPrroocceeeeddiinnggss
VVooll.. 114411:: MMaatthheemmaattiiccaall EEccoonnoommiiccss aanndd GGaammee TThheeoorryy.. EEssssaayyss iinn HHoonnoorr 11997788.. EEddiitteedd bbyy JJ.. KKrriieennss.. VV,, 113366 ppaaggeess.. 11997799..
ooff OOsskkaarr MMoorrggeennsstteerrnn.. EEddiitteedd bbyy RR.. HHeennnn aanndd OO.. MMooeesscchhlliinn.. XXIIVV,,
770033 ppaaggeess.. 11997777.. VVooll.. 116699:: AA RRaappooppoorrtt eett aall..,, CCooaalliittiioonn FFoorrmmaattiioonn bbyy SSoopphhiissttiiccaatteedd
PPllaayyeerrss.. VVIIII,, 117700 ppaaggeess.. 11997799..
VVooll.. 114422:: JJ.. SS.. LLaannee,, OOnn OOppttiimmaall PPooppuullaattiioonn PPaatthhss.. VV,, 112233 ppaaggeess.. 11997777..
VVooll.. 114433:: BB.. NNiiiisslluunndd,, AAnn AAnnaallyyssiiss ooff EEccoonnoommiicc SSiizzee DDiissttrriibbuuttiioonnss.. VVooll.. 117700:: AA EE.. RRootthh,, AAxxiioommaattiicc MMooddeellss ooff BBaarrggaaiinniinngg.. VV,, 112211 ppaaggeess..
XXVV,, 110000 ppaaggeess.. 11997777.. 11997799..
VVooll.. 114444:: CCoonnvveexx AAnnaallyyssiiss aanndd IIttss AApppplliiccaattiioonnss.. PPrroocceeeeddiinnggss 11997766.. VVooll.. 117711:: GG.. FF.. NNeewweellll,, AApppprrooxxiimmaattee BBeehhaavviioorr ooff TTaannddeemm QQuueeuueess.. XXII,,
EEddiitteedd bbyy AA.. AAuusslleennddeerr.. VVII,, 221199 ppaaggeess.. 11997777.. 441100 ppaaggeess.. 11997799..
VVooll.. 114466:: JJ.. RRoosseennmmuulllleerr,, EExxttrreemmee GGaammeess aanndd TThheeiirr SSoolluuttiioonnss.. IIVV,, VVooll.. 117722:: KK NNeeuummaannnn aanndd UU.. SStteeiinnhhaarrddtt,, GGEERRTT NNeettwwoorrkkss aanndd tthhee
112266 ppaaggeess.. 11997777.. TTiimmee--OOrriieenntteedd EEvvaalluuaattiioonn ooff PPrroojjeeccttss.. 226688 ppaaggeess .... 11997799..
VVooll.. 114466:: IInn SSeeaarrcchh ooff EEccoonnoommiicc IInnddiiccaattoorrss.. EEddiitteedd bbyy WW.. HH.. SSttrriiggeell.. VVooll.. 117733:: SS.. EErrllaannddeerr,, OOppttiimmaall SSppaattiiaall IInntteerraaccttiioonn aanndd tthhee GGrraavviittyy
XXVVII,, 119988 ppaaggeess.. 11997777.. MMooddeell.. VVIIII,, 110077 ppaaggeess.. 11998800..
VVooll.. 114477:: RReessoouurrccee AAllllooccaattiioonn aanndd DDiivviissiioonn ooff SSppaaccee.. PPrroocceeeeddiinnggss.. VVooll.. 117744:: EExxttrreemmaall MMeetthhooddss aanndd SSyysstteemmss AAnnaallyyssiiss.. EEddiitteedd bbyy AA VV..
EEddiitteedd bbyyTT.. FFuujjiiii aanndd RR.. SSaattoo.. VVIIIIII,, 118844 ppaaggeess.. 11997777.. FFiiaaccccoo aanndd KK.. OO.. KKoorrttssnneekk.. XXII,, 554455 ppaaggeess.. 11998800..
VVooll.. 114488:: CC.. EE.. MMaannddll,, SSiimmuullaattiioonnsstteecchhnniikk uunndd SSiimmuullaattiioonnssmmooddeellllee VVooll.. 117755:: SS.. KK.. SSrriinniivvaassaann aanndd RR.. SSuubbrraammaanniiaann,, PPrroobbaabbiilliissttiicc AAnnaallyyssiiss
iinn ddeenn SSoozziiaall--uunndd WWiirrttsscchhaaffttsswwiisssseennsscchhaafftteenn.. IIXX,, 117733 SSeeiitteenn.. 11997777.. ooff RReedduunnddaanntt SSyysstteemmss.. VVIIII,, 335566 ppaaggeess.. 11998800..
11110011.. 114499:: SSttaattiioonniiiirree uunndd sscchhrruummppffeennddee BBeevvoollkkeerruunnggeenn:: DDeemmooggrraa VVooll.. 117766:: RR.. FFaarree,, LLaawwss ooff DDiimmiinniisshhiinngg RReettuurrnnss.. VVIIIIII,, 9977 ppaaggeess.. 11998800..
pphhiisscchheess NNuullll--uunndd NNeeggaattiivvwwaacchhssttuumm iinn OOsstteerrrreeiicchh.. HHeerraauussggeeggeebbeenn
vvoonn GG.. FFeeiicchhttiinnggeerr.. VVII,, 226622 SSeeiitteenn.. 11997777.. VVooll.. 117777:: MMuullttiippllee CCrriitteerriiaa DDeecciissiioonn MMaakkiinngg--TThheeoorryy aanndd AApppplliiccaattiioonn..
PPrroocceeeeddiinnggss,, 11997799.. EEddiitteedd bbyy GG.. FFaannddeell aanndd TT.. GGaall.. XXVVII,, 557700 ppaaggeess..
VVooll.. 116600:: BBaauueerr eett aaII..,, SSuuppeerrccrriittiiccaall WWiinngg SSeeccttiioonnss IIIIII.. VVII,, 117799 ppaaggeess.. 11998800..
11997777..
VVooll.. 117788:: MM.. NN.. BBhhaattttaacchhaarryyyyaa,, CCoommppaarriissoonn ooff BBooxx--JJeennkkiinnss aanndd BBoonnnn
11110011..116611:: CC.. AA SScchhnneeeewweeiiBB,, IInnvveennttoorryy--PPrroodduuccttiioonn TThheeoorryy.. VVII,, 111166 ppaaggeess.. MMoonneettaarryy MMooddeell PPrreeddiiccttiioonn PPeerrffoorrmmaannccee.. VVIIII,, 114466 ppaaggeess.. 11998800..
11997777..
VVooll.. 116622:: KKiirrsscchh eett aaII..,, NNoottwweennddiiggee OOppttiimmaalliittllllttssbbeeddiinngguunnggeenn uunndd VVooll.. 117799:: RReecceenntt RReessuullttss iinn SSttoocchhaassttiicc PPrrooggrraammmmiinngg.. PPrroocceeeeddiinnggss,,
iihhrree AAnnwweenndduunngg.. VVII,, 116677 SSeeiitteenn.. 11997788.. 11997799.. EEddiitteedd bbyy PP.. KKaallll aanndd AA.. PPrreekkooppaa.. IIXX,, 223377 ppaaggeess.. 11998800..
VVooll.. 116633:: KKoommbbiinnaattoorriisscchhee EEnnttsscchheeiidduunnggsspprroobblleemmee:: MMeetthhooddeenn uunndd VVooll.. 118800:: JJ.. FF.. BBrroottcchhiiee,, JJ.. WW.. DDiicckkeeyy aanndd RR.. SShhaarrppee,, TTOOPPAAZZ -- GGeenneerraall
AAnnwweenndduunnggeenn.. HHeerraauussggeeggeebbeenn vvoonn TT.. MM.. LLiieebblliinngg uunndd MM.. RRoosssslleerr.. PPllaannnniinngg TTeecchhnniiqquuee aanndd iittss AApppplliiccaattiioonnss aatt tthhee RReeggiioonnaall,, UUrrbbaann,,
VVIIIIII,, 220066 SSeeiitteenn.. 11997788.. aanndd FFaacciilliittyy PPllaannnniinngg LLeevveellss.. VVIIII,, 335566 ppaaggeess.. 11998800..
VVooll.. 116644:: PPrroobblleemmss aanndd IInnssttrruummeennttss ooff BBuussiinneessss CCyyccllee AAnnaallyyssiiss.. VVooll.. 118811:: HH.. DD.. SShheerraallii aanndd CC.. MM.. SShheettttyy,, OOppttiimmiizzaattiioonn wwiitthh DDiissjjuunnccttiivvee
PPrroocceeeeddiinn99ss 11997777.. EEddiitteedd bbyy WW.. HH.. SSttrriiggeell.. VVII,, 444422 ppaaggeess.. 11997788.. CCoonnssttrraaiinnttss.. VVIIIIII,, 115566 ppaaggeess.. 11998800..
VVooll.. 116666:: MMuullttiippllee CCrriitteerriiaa PPrroobblleemm SSoollvviinngg.. PPrroocceeeeddiinnggss 11997777.. EEddiitteedd VVooll.. 118822:: JJ.. WWoolltteerrss,, SSttoocchhaassttiicc DDyynnaammiicc PPrrooppeerrttiieess ooff LLiinneeaarr EEccoo
bbyy SS.. ZZiioonnttss.. VVIIIIII,, 666677 ppaaggeess.. 11997788.. nnoommeettrriicc MMooddeellss.. VVIIIIII,, 115544 ppaaggeess.. 11998800..
VVooll.. 115566:: BB.. NNaasslluunndd aanndd BB.. SSeellllsstteedd~~ NNeeoo--RRiiccaarrddiiaann TThheeoorryy.. WWiitthh VVooll.. 118833:: KK SScchhiittttkkoowwsskkii,, NNoonnlliinneeaarr PPrrooggrraammmmiinngg CCooddeess.. VVIIIIII,, 224422
AApppplliiccaattiioonnss ttoo SSoommee CCuurrrreenntt EEccoonnoommiicc PPrroobblleemmss.. VVII,, 116666 ppaaggeess.. ppaaggeess.. 11998800..
11997788..
ccoonnttiinnuuaattiioonn oonn ppaaggee 221155
Lectu re Notes
in Economics and
Mathematical Systems
Managing Editors: M. Beckmann and W. Krelle
272
Gerhard Clemenz
Credit Markets
with Asymmetric Information
Springer-Verlag
Berlin Heidelberg New York London Paris Tokyo
Editorial Board
H. Albach M. Beckmann (Managing Editor) P. Dhrymes
G. Fandel J. Green W. Hildenbrand W. Krelle (Managing Editor) H.P. Kunzi
G.L. Nemhauser K. Ritter R. Sato U. Schittko P. Schonfeld R. Selten
Managing Editors
Prof. Dr. M. Beckmann
Brown University
Providence, RI 02912, USA
Prof. Dr. W. Krelle
Institut fUr Gesellschafts- und Wirtschaftswissenschaften
der Universitat Bonn
Adenauerallee 24-42, 0-5300 Bonn, FRG
Author
Dr. Gerhard Clemenz
Institut fUr Wirtschaftswissenschaften der Universitiit Wien
Liechtensteinstr. 13/11, A-1 090 Wien, Austria
ISBN-13: 978-3-540-16778-5 e-ISBN-13: 978-3-642-45614-5
001: 10.1007/978-3-642-45614-5
This work is subject to copyright. All rights are reserved, whether the whole or part of the material
is concerned, specifically those of translation, reprinting, re-use of illustrations, broadcasting,
reproduction by photocopying machine or similar means, and storage in data banks. Under
§ 54 of the German Copyright Law where copies are made for other than private use, a fee is
payable to "Verwertungsgesellschaft Wort", Munich.
© Springer-Verlag Berlin Heidelberg 1986
To my mother
ACKNOWLEDGEMENTS
This research was carried out over the last two years at the
University of Vienna, at the Hochschule fur Wirtschaft und Po1itik in
Hamburg and at the University of Bonn, and all three provided a
favourable environment for my work. My visits in Hamburg and Bonn have
been made possible through financial support from the Deutsche
Akademische Austauschdienst and the Deutsche Forschungsgemeinschaft,
and through the generous granting of leaves from the University of
Vienna.
C.Clemenz, R.Flotzinger, F.Haslinger, M.Nermuth, G.Orosel C.Podczeck
and G.Winckler have provided most valuable comments on earlier drafts.
Furthermore,l received help and encouragement at various stages and in
various forms from M.Bray, E.Dierker, M.Hellwig, R.Ho1zmann, H.Milde,
J.Stig1itz, E.Streipler and J.Sutton.
I also benefitted from the response of participants of various
meetings and seminars at which I had the opportunity to present some
of my work, e.g. at the European Econometric Society Meeting in
Madrid, at the Symposium on Money, Banking and Insurance in Karlsruhe,
at the 7. Heiligenkreuzer Arbeitskreis der theoretischen Okonomen
Osterreichs, at the 2nd International Meeting on Monetary Economics
and Banking in Nice and at Research Seminars at the University of
Vienna, at the Wirtschaftsuniversitat Wien and at the University of
Bonn. I wish to thank all my friends and fellow economists as well as
all institutions who supported me in undertaking this research and at
the same time exempt them from all responsibilities for its
shortcomings.
I am indebted to W.Richter for his technical assistance in the
production of earlier drafts, and to E.P1akolm for drawing the
diagrams. I am particularly grateful to M.Tatzber and H.M.Wurm who
struggled with 'patience and skill not only with my illegible
handwriting, but also with the intricacies of a new text processing
system.
Finally, I want to thank my wife, whose tireless support in so many
ways made it possible to write this book.
CONTENTS
Ch. 0: Introduction and General Overview 1
0.1 Subject and Scope 1
0.2 Summary of Contents 7
Ch. 1: Approaches to Equilibrium Credit Rationing 12
1.1 A General Description of a Credit Market 12
1.2 Definition of Credit Rationing 15
1.3 Borrowers With Different Wealth Endowments 20
1.4 The Role of the Horizontal Integration of 31
the Banking Firm
1.5 Implicit Contracts and Credit Rationing 34
1.6 Concluding Remarks 40
Ch. 2: Adverse Selection, Moral Hazard, and Credit 41
Rationing
2.1 The Basic Model 41
2.2 Projects of Different Riskiness 48
2.3 Borrowers of Different Honesty 56
2.4 Borrowers With Different Abilities 60
2.5 Unobservable Effort of Borrowers 64
2.6 Concluding Remarks 66
Ch. 3: Credit Rationing in Multi--Period Models 69
3.1 Overview 69
3.2 Rationing as an Incentive Device 70
3.3 Experience Rating of Borrowers 80
3.4 Rationing With Endogenous Costs of Default 83
3.5 Bankruptcy as a Joint Decision of Bank and 90
Borrower
3.6 Concluding Remarks 97
Ch. 4: Screening vs. Rationing. The Role of Collateral 98
4.1 Overview 98
4.2 Projects of Different Riskiness 99
4.3 The Jaffee and Russell Model 112
4.4 Borrowers With Different Abilities 118
VIII
4.5 Borrowers With Unobservable Effort 120
4.6 Concluding Remarks 122
Ch. 5: Loan Markets With Perfectly Divisible Projects 123
5.1 Overview 123
5.2 A Loan Market With Certain Returns 124
5.3 A Loan Market With Uncertain Returns 128
5.4 The Nash-Equilibrium With Borrowers of 137
Different Abilities
Appendix 143
Ch. 6: Variable Loan Size, Signalling and Endogenous 147
Information
6.1 Overview 147
6.2 Success-Failure Projects and Different Abilities 148
6.3 Strategic Stability of Credit Market Equilibria 155
6.4 Projects of Different Riskiness 163
6.5 Borrowers With Different Default Costs 164
6.6 Exchange of Information Between Banks 167
6.7 Concluding Remarks 173
Appendix 174
Ch. 7: Variable Loan Size and Type II Rationing 176
7.1 Overview 176
7.2 The Basic Model 177
7.3 °Loan Applicants With Different Default Costs 183
7.4 Loan Applicants With Different Abil it i es 186
7.5 Projects of Different Riskiness 191
7.6 The Role of Effort 194
7.7 Concluding Remarks 197
Ch. 8: Epilogue: Whither Now 199
Bibliography 204
INTRODUCTION AND GENERAL OVERVIEW
_'_'_ _ "_"_ .• _____. _. ...... '_'_'N'" _._. .. _ ••••• _ ............... _._. ___• • _._._. ____. ....._ • __ ••••• _ ......... .
The main purpose of this study is to apply analytical tools and
concepts developed in the "New Information Economics" to credit
markets in order to explore the possibility of equilibrium credit
rationing and its consequences.
The introduction is divided into two parts: This subsection attempts
to motivate the choice of both, subject and approach, while the
remainder of the introduction contains a summary of the contents of
the book.
Credit markets and, more generally, financial markets, have attracted
considerable attention from economists mainly for two reasons:
(i) They perform crucial functions in any advanced, monetary economy,
like the sharing of risk between different economic agents, the
allocation of loanable funds or the transmission of monetary impulses,
to name only the most obvious.
(ii) They have led many observers to conclude that they operate quite
differently from most other markets, with non-market clearing,
backward-bending supply curves or apparently inefficient equilibria
being the rule rather than the exception.
Both points have been recognized by economists of rather different
persuasions, though this does not imply agreement on either causes or
consequences of the alleged phenomena. So we are told by Keynes: "So
far ... as bank loans are concerned, lending does not take place
according to the principles of a perfect market. There is apt to be an
unsatisfied fringe of borrowers, the size of which can be expanded or
contracted, so that banks can influence the volume of investments by
2
expanding or contracting the volume of their loans, without there
being necessarily any change in the level of bank-rate, in the demand
schedule of borrowers, or in the volume of lending otherwise than
through banks. This phenomenon is capable, when it exists, of having
great practical importance." (Keynes 1930, p.190).
But also one of the great contemporaries and opponents of Keynes, F.A.
von Hayek, held the view that the banking sector and certain
peculiarities of the credit market are crucial for an explanation of
business cycles (Hayek 1969).
To quite a different camp than Hayek belong economists like Davidson
(1972) or Minsky (1975) who also assign great importance to financial
markets in their reinterpretation of Keynes.
While the authors mentioned so far considered various aspects of
credit markets, the proponents of the so-called "availability
doctrine" were the first to focus attention on credit-rationing, a
phenomenon which is also the central theme of the present book. The
contributions of Roosa (1951), Scott (1957a, b) or Lindbeck (1962)
were reactions to the then quite commonly held view that monetary
policy could exert only little influence on real variables like
investment or national income. Availability theorists argued that
monetary policy could be used to change aggregate demand even if
investment were insensitive to the rate of interest if variations of
the money supply were reflected in changes of the availability of
loans rather than in changes of the interest rate.
Since then there has been continued interest in credit rationing for
at least three reasons:
(i) The first issue under consideration was whether there exist
plausible conditions which make rationing compatible with individual
rationality without resorting to exogenous factors like interest rate
regulations.
(ii) The second problem was to investigate whether rationing implied
inefficiency and if so what remedies could be applied.
3
(iii) The third question was whether credit rationing had any effect
on the working of monetary policy.
Despite this interest in credit rationing up to the mid seventies
little progress had been achieved in providing a sound and convincing
theoretical explanation of this phenomenon. In fact, there was not
even full agreement about what the term credit rationing actually
meant. As will be argued in some detail later (cf. ch. 1 and 5), a
naive application of the concept of excess demand in a conventional
goods market to a loan market, can be as misleading as Keynes' casual
reference to "a fringe of unsatisfied borrowers", which appears too
simple for such a complex phenomenon. Of course, one can define any
state, in which some or all loan applicants do not get a loan of the
size they desire at the ruling rate of interest as credit rationing;
and for the purpose of this introduction such a definition will do,
but as the analysis proceeds it should become apparent that some care
is required when applying this definition to specific credit market
equilibria.
In any case, whatever definitions have been used, most of the older
models assumed rather than explained credit rationing or introduced ad
hoc rigidities which resulted in rationing, as conventional theory
would have suggested anyway.
A major breakthrough ocurred in the 1970's, when interest in markets
with imperfect information increased and led to many new insights into
the functioning of markets and other (economic) organisations.
Particularly fruitful proved models of asymmetric quality information
as initiated in the seminal paper by Akerlof (1970). The basic idea is
as simple as it is powerful. For many economic transactions it is true
that one party has to payor to commit itself before knowing with
certainty what it will get in exchange. This is the case with
"experience" goods where, in contrast to "inspection" goods, the buyer
cannot tell the quality on the spot (the terminology is due to Nelson
(1970». Usually the seller knows exactly what quality the good has,
whereas the buyer knows at best some probability distribution over the
quality (assuming it can be defined and measured in an appropriate
way). Now, as Akerlof (1970) shows for a used cars market, the quality
of goods offered may be correlated with the market price, with the
