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.
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: 08 Dec 2014 *