Variable Loan Size and Type II Rationing

Abstract

In the preceding two chapters it has been analyzed at some length what problems may arise with respect to the equilibria of credit markets with asymmetric information and variable, endogenously determined loan size. In particular, it has become apparent that allocative efficiency will not be achieved in general, which leaves room for potentially beneficial policy measures, an issue not pursued further in this study. It has also turned out that some variant of Type I Rationing may occur (see 6.4, 6.5), though in some situations borrowers will feel induced to demand a larger loan size than they actually want at the quoted loan rate in order to signal their credit worthiness (see 6.2). What has not occurred, however, is Type II Rationing which has been the main theme of chapters 2-4. This is hardly surprising since it has been assumed that the supply of loanable funds is infinitely elastic, but apparently some authors attach even more weight to the endogenization of the individual loan size. So we read in Milde and Riley (1984) “...once we drop this assumption [of a fixed loan size] the stickiness result no longer arises”.