Title: Moral hazard contracting and credit rationing in opaque credit markets

Authors: Xin He

Addresses: Surrey International Institute & Global Institute of Management and Economics, Dongbei University of Finance and Economics, Dalian, Liaoning 116025, China

Abstract: We make a first step in the literature to analyse a hybrid model of credit rationing with simultaneous presence of adverse selection and moral hazard. Motivated by the observation that credit markets in less-developed countries are rather opaque owing to the lack of necessary institutions to facilitate information sharing among lenders, we re-examine the issue of credit rationing in such an environment. For a range of different parameter values, we fully characterise the subgame perfect equilibria (SPE) of the loan contracting game. Under certain parameter values, there is type-II credit rationing for some borrowers and credit forcing for others. Credit forcing is shown to be efficient in a constrained sense. The results are contrasted with those in DeMeza and Webb (1992).

Keywords: credit rationing; opaque credit markets; contract; moral hazard; adverse selection; information sharing; subgame perfect equilibria; SPE; loan contracting game; credit forcing.

DOI: 10.1504/IJCEE.2015.066221

International Journal of Computational Economics and Econometrics, 2015 Vol.5 No.1, pp.12 - 34

Received: 22 Jan 2014
Accepted: 21 Jul 2014
Published online: 17 May 2015 *

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