Documente Academic
Documente Profesional
Documente Cultură
Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at .
http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless
you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you
may use content in the JSTOR archive only for your personal, non-commercial use.
Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at .
http://www.jstor.org/action/showPublisher?publisherCode=aea. .
Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed
page of such transmission.
JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact support@jstor.org.
American Economic Association is collaborating with JSTOR to digitize, preserve and extend access to The
American Economic Review.
http://www.jstor.org
Credit Rationing in Marketswith
ImperfectInformation
By JOSEPH E. STIGLITZ AND ANDREW WEISS*
Why is credit rationed? Perhaps the most they receive on the loan, and the riskiness of
basic tenet of economics is that market equi- the loan. However, the interest rate a bank
librium entails supply equalling demand; that charges may itself affect the riskiness of the
if demand should exceed supply, prices will pool of loans by either: 1) sorting potential
rise, decreasing demand and/or increasing borrowers (the adverse selection effect); or 2)
supply until demand and supply are equated affecting the actions of borrowers (the incen-
at the new equilibrium price. So if prices do tive effect). Both effects derive directly from
their job, rationing should not exist. How- the residual imperfect information which is
ever, credit rationing and unemployment do present in loan markets after banks have
in fact exist. They seem to imply an excess evaluated loan applications. When the price
demand for loanable funds or an excess (interest rate) affects the nature of the trans-
supply of workers. action, it may not also clear the market.
One method of "explaining" these condi- The adverse selection aspect of interest
tions associates them with short- or long-term rates is a consequence of different borrowers
disequilibrium. In the short term they are having different probabilities of repaying
viewed as temporary disequilibriumphenom- their loan. The expected return to the bank
ena; that is, the economy has incurred an obviously depends on the probability of re-
exogenous shock, and for reasons not fully payment, so the bank would like to be able
explained, there is some stickiness in the to identify borrowers who are more likely to
prices of labor or capital (wages and interest repay. It is difficult to identify "good bor-
rates) so that there is a transitional period rowers," and to do so requires the bank to
during which rationing of jobs or credit oc- use a variety of screening devices. The inter-
curs. On the other hand, long-term un- est rate which an individual is willing to pay
employment (above some "natural rate") or may act as one such screening device: those
credit rationing is explained by governmen- who are willing to pay high interest rates
tal constraints such as usury laws or mini- may, on average, be worse risks; they are
mum wage legislation.' willing to borrow at high interest rates be-
The object of this paper is to show that cause they perceive their probability of re-
in equilibrium a loan market may be char- paying the loan to be low. As the interest
acterized by credit rationing. Banks making rate rises, the average "riskiness" of those
loans are concerned about the interest rate who borrow increases, possibly lowering the
bank's profits.
*Bell Telephone Laboratories, Inc. and Princeton Similarly, as the interest rate and other
University, and Bell Laboratories, Inc., respectively. We terms of the contract change, the behavior of
would like to thank Bruce Greenwald, Henry Landau, the borrower is likely to change. For in-
Rob Porter, and Andy Postlewaite for fruitful comments stance, raising the interest rate decreases the
and suggestions. Financial support from the National return on projects which succeed. We will
Science Foundation is gratefully acknowledged. An
earlier version of this paper was presented at the spring show that higher interest rates induce firms
1977 meetings of the Mathematics in the Social Sciences to undertake projects with lower probabili-
Board in Squam Lake, New Hampshire. ties of success but higher payoffs when suc-
'Indeed, even if markets were not competitive one cessful.
would not expect to find rationing; profit maximization
would, for instance, lead a monopolistic bank to raise
In a world with perfect and costless infor-
the interest rate it charges on loans to the point where mation, the bank would stipulate precisely
excess demand for loans was eliminated. all the actions which the borrower could
393
394 THE AMERICAN ECONOMIC REVIEW JUNE 1981
z no competitiveforcesleadingsupply to equal
m demand, and creditis rationed.
w
But the interestrate is not the only termof
1Z the contractwhichis important.The amount
0
2I-
a-
/ of the loan, and the amount of collateral or
equity the bank demandsof loan applicants,
w will also affect both the behavior of bor-
@
-
w rowers and the distributionof borrowers.In
Section III, we show that increasing the col-
INTEREST RATE
lateralrequirementsof lenders(beyond some
w r
point) may decreasethe returnsto the bank,
by either decreasingthe average degree of
FIGURE 1. THERE EXISTSAN INTERESTRATE WHICH
MAXIMIZESTHE EXPECTEDRETURN TO THE BANK
risk aversionof the pool of borrowers;or in
a multiperiodmodel inducing individual in-
vestors to undertakeriskierprojects.
Consequently,it may not be profitable to
raise the interest rate or collateral require-
undertake(which might affect the returnto ments when a bank has an excess demand
the loan). However, the bank is not able to for credit; instead, banks deny loans to bor-
directly control all the actions of the bor- rowers who are observationally indis-
rower; therefore,it will formulatethe terms tinguishablefromthose who receive loans.2
of the loan contractin a mannerdesignedto It is not our argumentthat credit rationing
induce the borrower to take actions which will always characterizecapital markets, but
are in the interest of the bank, as well as to rather that it may occur under not implausi-
attractlow-riskborrowers. ble assumptions concerning borrower and
For both these reasons, the expected re- lender behavior.
turn by the bank may increase less rapidly This paper thus providesthe first theoret-
than the interest rate; and, beyond a point, ical justificationof true credit rationing. Pre-
may actuallydecrease,as depictedin Figure vious studies have sought to explain why
1. The interest rate at which the expected each individualfaces an upward sloping in-
returnto the bank is maximized,we referto terest rate schedule.The explanationsoffered
as the "bank-optimal"rate, Pr. are (a) the probability of default for any
Both the demandfor loans and the supply particularborrowerincreasesas the amount
of funds are functions of the interest rate borrowed increases(see Stiglitz 1970, 1972;
(the latterbeing determinedby the expected Marshall Freimer and Myron Gordon;
return at r*). Clearly, it is conceivable that at Dwight Jaffee; George Stigler), or (b) the
r the demandfor funds exceeds the supply mix of borrowers changes adversely (see
of funds. Traditional analysis would argue Jaffee and ThomasRussell).In these circum-
that, in the presenceof an excess demandfor stances we would not expect loans of differ-
loans, unsatisfied borrowerswould offer to ent size to pay the same interest rate, any
pay a higher interest rate to the bank, bid- more than we would expect two borrowers,
ding up the interestrate until demandequals one of whom has a reputationfor prudence
supply. But although supply does not equal and the other a reputationas a bad credit
demand at r*, it is the equilibriuminterest risk, to be able to borrowat the same interest
rate!The bank would not lend to an individ- rate.
ual who offered to pay more than r*. In the We reserve the term credit rationing for
bank'sjudgment,such a loan is likely to be a circumstancesin whicheither(a) among loan
worse risk than the averageloan at interest applicants who appearto be identical some
rate P*, and the expected return to a loan at
an interest rate above r* is actually lower 2After this paper was completed,our attention was
than the expected return to the loans the drawnto W. Keeton'sbook.In chapter3 he developsan
bank is presently making. Hence, there are incentiveargumentfor creditrationing.
VOL. 71 NO. 3 STIGLITZAND WEISS:CREDITRATIONING 395
receive a loan and others do not, and the of projects; for each project 6 there is a
rejectedapplicants would not receive a loan probabilitydistributionof (gross) returnsR.
even if they offered to pay a higher interest We assume for the moment that this distri-
rate; or (b) there are identifiablegroups of bution cannot be alteredby the borrower.
individuals in the population who, with a Different firms have different probability
given supply of credit, are unable to obtain distributionsof returns.We initially assume
loans at any interestrate,even thoughwith a that-the bank is able to distinguishprojects
largersupply of credit, they would.3 with different mean returns, so we will at
In our construction of an equilibrium first confine ourselves to the decision prob-
model with credit rationing, we describe a lem of a bank facing projects having the
marketequilibriumin which there are many same mean return. However, the bank can-
banks and many potential borrowers.Both not ascertainthe riskiness of a project. For
borrowersand banks seek to maximizeprof- simplicity, we write the distribution of re-
its, the former through their choice of a turns4as F(R, 0) and the density functionas
project, the latter through the interest rate f(R, 0), and we assume that greater6 corre-
they chargeborrowersand the collateralthey sponds to greaterrisk in the sense of mean
require of borrowers (the interest rate re- preservingspreads5(see Rothschild-Stiglitz),
ceived by depositors is determinedby the i.e., for , >2,Jif
zero-profitcondition). Obviously,we are not
discussing a "price-taking"equilibrium.Our 00 0
L~~~~~~~~~L
L
X LD
0
~ ~ irm '
TYPES
APPLY ONL
/ /HIG~H RISK '~ ~ ---------
/ / ~APPLY
rl ?
sive group drops -out of the market, there is a
FIGURE 3. OPTIMALINTERESTRATE r1 discrete fall in (where p(r) is the mean
return to the bank from the set of applicants at
hence using Theorem 1, the result is im- the interest rate r).
mediate.
We next show: Other conditions for nonmonotonicity of
p(r) will be established later. Theorems 5
THEOREM 3: The expected return on a loan and 6 show why nonmonotonicity is so im-
to a bank is a decreasing function of the portant:
riskiness of the loan.
THEOREM 5: Wheneverp(r) has an interior
PROOF: mode, there exist supply functions of funds
From (4b) we see that p(R, r) is a con- such that competitive equilibriumentails credit
cave function of R, hence the result is im- rationing.
mediate. The concavity of p(R, r) is il-
lustratedin Figure2b. This will be the case whenever the "Wal-
Theorems2 and 3 imply that, in addition rasian equilibrium" interest rate- the one at
to the usual direct effect of increasesin the which demand for funds equals supply-is
interestrate increasinga bank'sreturn,there such that there exists a lower interest rate for
is an indirect,adverse-selectioneffect acting which p, the return to the bank, is higher.
in the oppositedirection.We now show that In Figure 4 we illustrate a credit rationing
this adverse-selectioneffect may outweigh equilibrium. Because demand for funds de-
the directeffect. pends on r, the interest rate charged by
To see this most simply, assumethere are banks, while the supply of funds depends on
two groups; the "safe" group will borrow p, the mean return on loans, we cannot use a
only at interest rates below r,, the "risky" conventional demand/supply curve diagram.
group below r2, and r, <r2. When the inter- The demand for loans is a decreasing func-
est rate is raisedslightlyabove r,, the mix of tion of the interest rate charged borrowers;
applicantschangesdramatically:all low risk this relation LD is drawn in the upper right
applicantswithdraw.(See Figure 3.) By the quadrant. The nonmonotonic relation be-
sameargumentwe can establish tween the interest charged borrowers, and
the expected
- return to the bank per dollar
THEOREM 4: If there are a discrete number loaned is drawn in the lower right quadrant.
of potential borrowers(or types of borrowers) In the lower left- quadrant we depict the
each with a different 0, p(r) will not be a relation between and the supply of loana-
monotonicfunction of r, since as each succes- ble funds LS. (We have drawn LS as if it
398 THE A MERICAN ECONOMIC RE VIEW JUNE 1981
would switch to a loan offer betweenr, and large if (g(0)/[l - G(O)]) (dO/d?) is large,
r2. A bank offering an interest rate r4 such that is, a small change in the nominal inter-
that p(r4)>p(r,) would not be able to at- est rate induces a large change in the appli-
tract any borrowerssince by definitionr4> cant pool.
r2, and thereis no excess demandat interest
rate r2. 2. Two Outcome Projects
Here we consider the simplest kinds of
A. Alternative Sufficient Conditionsfor projects(from an analyticalpoint of view),
Credit Rationing those whicheithersucceedand yield a return
R, or fail and yield a returnD. We normalize
Theorem4 provideda sufficientcondition to let B= 1. All the projectshave the same
for adverseselection to lead to a nonmono- unsuccessfulvalue (whichcould be the value
tonic -p(r)function.In the remainderof this of the plant and equipment)while R ranges
section, we investigate other circumstances between S and K (where K> S). We also
under which for some levels of supply of assume that projectshave been screenedso
funds therewill be creditrationing. that all projectswithin a loan categoryhave
the same expected yield, T, and there is no
1. Continuumof Projects collateralrequired,that is, C= 0, and if p( R)
Let G(O)be the distributionof projectsby representsthe probabilitythat a projectwith
riskiness0, and p(O,r) be the expected re- a successfulreturnof R succeeds,then
turn to the bank of a loan of risk 0 and
interestrate r. The mean returnto the bank (9) p(R)R+ T
[1-p(R)]D=
whichlends at the interestrate r is simply
P00 In addition, the bank suffers a cost of X
P(, r) dG(O) per dollar loaned upon loans that default,
(7) (r) -G(= which could be interpretedas the difference
) betweenthe value of plant and equipmentto
the firm and the value of the plant and
FromTheorem5 we know that dp(rP)/dP<O equipmentto the bank. Again the density of
for some value of r is a sufficientcondition projectvalues is denotedby g(R), the distri-
for creditrationing.Let p(6, r)= p so that bution functionby G(R).
Therefore,the expected returnper dollar
dp lent at an interestrate r, if we let J=r+ 1, is
g(6) dO (since individualswill borrowif and only if
dr [1- G(6 ] dP R >J):
(10)
| [- F((l + r)B - C, )] dG(O)
+ r)
fKg()=A [ J Kp(R) g(R) dR
1-G(O )
PROOF: B. An Example
The expected return to the ith project is
given by To illustratethe implicationsof Theorem
8, assumeall firms are identical,and have a
(13 w-E
choice of two projects,yielding,if successful,
axR'(I+-),_
returnsRa and Rb, respectively(and nothing
402 THE AMERICAN ECONOMIC REVIEW JUNE 1981
dR U_'p + (U-U2_)p'
z SELF-FINANCED (25) dW t0as Up
RISKY INVESTMENT
SAFE INVESTMENT
H (U-Uf
-J~~~~~~~~~~EF
But
F 7ALL APPLY FOR LOANSE SE
A SCREENI E FINANCED
Li
I~~~~J
ALL ~RISKY lrn - __
-
--_ =A1
SELF-FINANCE j INVESTMENT
wI -w2 U,-U2 I
-\
~~~~~wo implying that, if WI = W2, dR/dWo = 0.
However,
FIGuRE 7. COLLATERALSERVESAS
A SCREENINGDEVICE
af -Al - U,l- U
But
awl Ul ' u;-
- ____
u;
dVB
(23) (L U( p ))p* A? U- U
dW =(Up+
=-At _ Ull + If U2 U,
Clearly, only those with W0> C can borrow. 1 Ul- U2 Ul-U2 Ul-U2
We assume there exists a value of W0>0,
denoted W0, such that VB(WO)=U(p*WO). -Al iO as Al ?0
(This will be true for some values of p*.) By
the same kind of argument used earlier, it is Hence dR/dWo >0 if A'<0.
clear that at W0, borrowing with collateral is Next we show
a mean-utility preserving spread of terminal
wealth in comparison to not borrowing and THEOREM 11: Collateral increases the
not undertaking the project. Thus using (20) bank 's returnfrom any given borrower:
and (23), dVB/dWo > dV( W0)/dWo at W0.
Hence, for W0< W<<W0 all individuals ap- dp/dC>O
ply for loans, as depicted in Figure 7.
Thus, restricting ourselves to W0<W0, we PROOF:
have established that if there is any borrow- This follows directly from the first-order
ing, it is the wealthiest in that interval who condition (24):
borrow. (The restriction W0<W0 is weaker
than the restriction that the scale of projects sign d=sign U2p*p'<0
exceeds the wealth of any individual.)
Next, we show:
and thus dp/dC>O. But
THEOREM 10: If there is decreasing abso-
lute risk aversion, wealthier individuals under- THEOREM 12: There is an adverse selection
take riskier projects: dR/dWo > 0. effect from increasing the collateral require-
ment, i.e., both the average and the marginal
PROOF: borrower who borrows is riskier," dWo/dC
From (21), we obtain the first-order condi- >0.
tion for the choice of R:
1 "Ata sufficiently high collateral, the wealthy individ-
(24) U"p+ (Ul - U2)p'=0 ual will not borrow at all.
VOL. 71 NO. 3 STIGLITZ AND WEISS: CREDITRATIONING 405
r2 r3 r3 r1 r
We can show that under certain circum-
stances, it will pay the bank to extend the FIGURE 9. IF GROUPS DIFFER, THEREWILL EXIST
line of credit M. Thus, although the bank RED LINING
controls L, it does not control directly the
total (expected value) of its loans per
customer, L+ (I-p )M. THEOREM 13: For i>j, typej borrowers
But more to the point is the fact that the will only receive loans if credit is not rationed
expected return to the bank may not be to type i borrowers.
monotonically decreasing in the size of the
first-period loans. For instance, under the PROOF:
hypothesis that r', and P2are optimally cho- Assumenot. Sincethe maximumreturnon
sen and at the optimum p*>p2(l +r), the the loan to j is less than that to i, the bank
return to the bank is a decreasing function of could clearlyincreaseits returnby substitut-
M/L. Thus, if the optimal response of the ing a loan to i for a loan to j; hence the
firm to a decrease in L is an increase in M originalsituationcould not have been profit
(or a decrease in M so long as the percentage maximizing.
decrease in M is less than the percentage We now show
decrease in L), a decrease in L actually lowers
the bank's profits.'4 THEOREM 14: The equilibriuminterest rates
are such that for all i, j receiving loans, pi('i)
r
IV. Observationally
DistinguishableBorrowers =pj(r ).
ered the possibilitythat the agent will fail to In a multiperiodcontext, for instance, banks
pay the fixed fee. In the particularcontext of could reward"good"borrowersby offering
the bank-borrowerrelationship,the assump- to lend to them at lower interest rates, and
tion that the loan will alwaysbe repaid(with this would induce firms to undertake safer
interest) seems most peculiar. A borrower projects (just as in the labor market, the
can repaythe loan in all statesof natureonly promise of promotion and pay increases is
if the riskyproject'sreturnsplus the value of an importantpart of the incentive and sort-
the equilibriumlevel of collateralexceedsthe ing structureof firms,see Stiglitz, 1975, J. L.
safe rateof interestin all statesof nature. Guasch and Weiss, 1980, 1981). In our 1980
The consequencesof this are important. paper, we analyze the nature of equilibrium
Since the agent can by his actions affect the contracts in a dynamic context. We show
probability of bankruptcy, fixed-fee con- that such contingency contracts may char-
tracts do not eliminate the incentive prob- acterizethe dynamicequilibrium.Indeed, we
lem. establish that the bank may want to use
Moreover,they do not necessarilylead to quantity constraints- the availability of
optimalresourceallocations.For example,in credit-as an additional incentive device;
the two-projectcase discussedabove(Section thus, in the dynamiccontext there is a fur-
II, Part B), if expected returns to the safe ther argumentfor the existence of rationing
project exceed that to the risky (psRs >prRr) in a competitiveeconomy.
but the highest rate which the bank can Even after introducingall of these addi-
chargeconsistentwith the safe projectbeing tional instruments(collateral, equity, non-
chosen (r*) is too low (i.e., pS(l +r*)>prRr) linear payment schedules, contingency con-
then the bank chooses an interestrate which tracts) there may exist a contract which is
causes all its loans to be for risky projects, optimal from the point of view of the prin-
although the expected total (social) returns cipal; he will not respond,then, to an excess
on these projects are less than on the safe supply of agentsby alteringthe terms of that
projects.In this case a usury law forbidding contract;and theremay then be rationingof
interestrates in excess of r* will increasenet the form discussedin this paper, that is, an
national output. Our 1980 paper and Janusz excess demandfor loans (capital,land) at the
Ordover and Weiss show that government "competitive"contract.
interventionsof variousformslead to Pareto
improvementsin the allocationof credit. VI. Conclusions
Because neither equity finance nor debt
finance lead to efficient resourceallocations, We have presenteda model of credit ra-
we would not expect to see the exclusiveuse tioning in which amongobservationallyiden-
of either method of financing (even with tical borrowerssome receiveloans and others
risk-neutralagentsand principals).Similarly, do not. Potentialborrowerswho are denied
in agriculture,we would not expectto see the loans would not be able to borrow even if
exclusive use of rental or sharecropping they indicated a willingness to pay more
tenancy arrangements. In general, where than the marketinterest rate, or to put up
feasible,the payoff will be a non-linearfunc- more collateralthan is demanded of recipi-
tion of output (profits). The terms of these ents of loans. Increasing interest rates or
contractswill depend on the risk preferences increasing collateralrequirementscould in-
of the principal and agent, the extent to crease the riskinessof the bank's loan port-
which their actions (both the level of effort folio, either by discouragingsafer investors,
and riskiness of outcomes) can affect the or by inducingborrowersto invest in riskier
probabilityof bankruptcy,and actions can projects, and therefore could decrease the
be specifiedwithin the contractor controlled bank's profits.Hence neitherinstrumentwill
directlyby the principal. necessarilybe used to equate the supply of
One possiblecriticismof this paperis that loanable funds with the demandfor loanable
the single period analysis presented above funds. Under those circumstancescredit re-
artificiallylimitsthe strategyspaceof lenders. strictions take the form of limiting the num-
VOL. 71 NO. 3 STIGLITZ AND WEISS. CREDIT RATIONING 409
ber of loans the bank will make,ratherthan directly affects the quality of the loan in a
limitingthe size of each loan, or makingthe manner which matters to the bank. Other
interestrate chargedan increasingfunction models in which prices are set competitive-
of the magnitude of the loan, as in most ly and non-market-clearingequilibria exist
previousdiscussionsof creditrationing. share the propertythat the expected quality
Note that in a rationing equilibrium,to of a commodityis a functionof its price (see
the extent that monetarypolicy succeedsin Weiss, 1976, 1980,or Stiglitz,1976a,b for the
shiftingthe supplyof funds, it will affect the labor marketand C. Wilson for the used car
level of investment,not throughthe interest market).
rate mechanism, but rather through the In any of these models in which, for in-
availability of credit. Although this is a stance, the wage affects the qualityof labor,
"monetarist"result, it should be apparent if thereis an excess supply of workersat the
that the mechanismis different from that wage which minimizeslabor costs, there is
usuallyput forth in the monetaristliterature. not necessarilyan inducementfor firms to
Although we have focused on analyzing lower wages.
the existenceof excess demandequilibriain The Law of Supplyand Demand is not in
credit markets, imperfect information can fact a law, nor should it be viewed as an
lead to excess supply equilibriaas well. We assumptionneeded for competitiveanalysis.
will sketchan outline of an argumenthere (a It is rathera resultgeneratedby the underly-
fuller discussion of the issue and of the ing assumptionsthat priceshave neithersort-
macro-economicimplicationsof this paper ing nor incentive effects. The usual result
will appearin futurework by the authorsin of economic theorizing: that prices clear
conjunctionwith BruceGreenwald)."7 Let us markets,is model specific and is not a gen-
assumethat banks make higherexpectedre- eral property of markets- unemployment
turns on some of their borrowersthan on and creditrationingare not phantasms.
others: they know who their most credit
worthy customersare, but competingbanks
do not. If a banktriesto attractthe customers REFERENCES
of its competitorsby offeringa lowerinterest
rate, it will find that its offer is counteredby P. Diamond and J. E. Stiglitz, "Increases in
an equally low interest rate when the Risk and in Risk Aversion," J. Econ. The-
customer being competed for is a "good" ory, July 1974, 8, 337-60.
credit risk, and will not be matched if the M. Freimerand M. J. Gordon,"Why Bankers
borroweris not a profitablecustomerof the Ration Credit," Quart.J. Econ., Aug. 1965,
bank. Consequently,banks will seldom seek 79, 397-416.
to steal the customersof their competitors, Bruce Greenwald,Adverse Selection in the
since they will only succeedin attractingthe Labor Market, New York: Garland Press
least profitableof those customers(introduc- 1979.
ing some noise in the system enables the J. L. Guaschand A. Weiss, "Wages as Sorting
developmentof an equilibrium).A bankwith Mechanisms: A Theory of Testing," Rev.
an excess supply of loanable funds must Econ. Studies, July 1980, 47, 653-65.
assess the profitabilityof the loans a lower and _ , "Self-Selection in the
interest rate would attract. In equilibrium Labor Market," Amer. Econ. Rev., forth-
each bank may have an excess supply of coming.
loanable funds, but no bank will lower its DwightJaffee, Credit Rationing and the Com-
interestrate. mercial Loan Market, New York: John
The reason we have been able to model Wiley & Sons 1971.
excess demand and excess supply equilibria and T. Russell, "Imperfect Informa-
in credit markets is that the interest rate tion and Credit Rationing," Quart.J. Econ.
Nov. 1976, 90, 651-66.
17A similar argument to that presented here appears W. Keeton,EquilibriumCredit Rationing, New
in Greenwald in the context of labor markets. York: Garland Press 1979.
410 THE AMERICAN ECONOMIC REVIEW JUNE 1981
J. OrdoverandA. Weiss, "Information and the come in L.D.C.'s," Oxford Econ. Papers,
Law: Evaluating Legal Restrictions on July 1976, 28, 185-207.
Competitive Contracts," Amer. Econ. Rev. ,9___ "Perfect and Imperfect Capital
Proc., May 1981, 71, 399-404. Markets," paper presented to the New
M. Rothschildand J. E. Stiglitz, "Increasing Orleans meeting of the Econometric
Risk: I, A Definition," J. Econ. Theory, Society,Dec. 1970.
Sept. 1970, 2, 225-43. , "Some Aspects of the Pure Theory
S. Shavell, "Risk Sharing and Incentives in of CorporateFinance: Bankruptciesand
the Principal and Agent Problem," Bell J. Take-Overs,"Bell J. Econ., Autumn 1972,
Econ., Spring 1979, 10, 55-73. 3, 458-82.
G. Stigler, "Imperfections in the Capital and A. Weiss, "Credit Rationing in
Market," J. Polit. Econ., June 1967, 85, Marketswith ImperfectInformation,Part
287-92. II: A Theory of ContingencyContracts,"
J. E. Stiglitz,"Incentives and Risk Sharing in mimeo. Bell Laboratoriesand Princeton
Sharecropping," Rev. Econ. Studies, Apr. Univ. 1980.
1974, 41, 219-55. A. Weiss, "A Theory of Limited Labor
, "Incentives, Risk, and Information: Markets,"unpublisheddoctoral disserta-
Notes Towards a Theory of Hierarchy," tion, StanfordUniv. 1976.
Bell J. Econ., Autumn 1975, 6, 552-79. , "Job Queues and Layoffs in Labor
, "Prices and Queues as Screening Markets with Flexible Wages," J. Polit.
Devices in Competitive Markets," IMSSS Econ.,June 1980,88, 526-38.
tech. report no. 212, Stanford Univ. C. Wilson,"The Nature of Equilibriumin
, "The Efficiency Wage Hypothesis, Marketswith Adverse Selection,"Bell J.
Surplus Labor and the Distribution of In- Econ., Spring 1980, 11, 108-30.