Volume 43, Number 171,
October-December 2012
Credit Rationing:
A Perspective from New Keynesian Economics
Abigail Rodríguez and Francisco Venegas
FINANCING AND EVALUATING INVESTMENT PROJECTS ( ...continuation )

Allen (1983) explains the endogeneity of rationing by defining the penalty if the debtor defaults, while Stiglitz and Weiss (1981) propose that the debtor with more information about the projects avoids credit restrictions and directs the lender’s future actions. In this case, the commercial bank ensures that the debtor pays. Allen (1983) emphasizes that in models with multiple periods, renewing the credit is subject to payment of previous interest. If it is assumed that banks share information, clients who default will be excluded from the market (they will not be given resources in the future). These clients will be forced to pay whenever the cost of returning the loan is less than or equal to the cost of accessing the market in the future.

Bester (1985) expands Stiglitz and Weiss’s proposal. He believes that the collateral demanded as a guarantee is a signaling mechanism that reveals the applicant’s risk and cancels credit rationing.10 If credit market equilibrium is defined considering the set of contracts (each one establishes an active rate and collateral), the fraction of companies that receive resources and expected earnings for the company, rationing does not occur if the following conditions are fulfilled: a) the applicant companies can offer collateral without incurring costs; the requested collateral is equal to the future value of the debt, eliminating risk of default and there are no issues of adverse selection; b) there is evidence of a monotonous relationship between risk and the requesting company’s preferences.

The expectation of incurring future monitoring costs due to debtor default leads lenders to ration credit in Williamson’s (1987) proposal. The expected profit for those offering credit is positive with respect to the expected yield of the projects and negative in relation to the monitoring costs. On the other hand, the expected profit of the companies is also a positive function of yields, but a negative function of the promised amount to pay. Bernanke and Gertler (1989) write that the agency costs are derived from the creditor’s inability to observe the state of business for the financed companies. They try to prove that the net value (or initial wealth) of the property of the credit applicants determines the agency costs. In this way, for example, favorable periods commonly improve the company’s position and as such, reduce the verification costs and facilitate renewing future credit.

THE RELATIONSHIP BETWEEN BORROWERS AND LENDERS

Various approaches have been used to analyze the relationship between agents supplying and demanding credit, but all cases highlight each agent’s actions to maximize benefits or profits. The main proposals are: transfer of information and the needs of financial intermediaries, studied in Leland and Pyle (1977) and in Campbell and Kracaw (1980); the collusion between borrowers to face scarce information about applicants, examined by Mason (1977) and Boyd and Prescott (1986) and the prospect of future earnings for lenders when they maintain long-term relationships with their clients. This approach has two basic ways of thinking: some works argue that more solid relationships improve credit conditions for clients, such as in Mason (1977), Petersen and Rajan (1995), Berger and Udell (1995) and Berger and Udell (2005). Other works, such as Blackwell and Santomero (1982) and Greenbaum, Kanatas and Venezia (1989), affirm that credit conditions are not necessarily more favorable for preferential clients.

Leland and Pyle’s (1977) work explores the relationship between borrowers and lenders using information transfer to lenders regarding the quality of investment projects that seek financing. The transfer of information and willingness to invest are signaling mechanisms because they reveal the characteristics of the projects; given asymmetry of information and the existence of transaction costs, the financial intermediaries must provide truthful information about the value of the companies to build the best investment portfolios.11 As a continuation of Leland and Pyle’s (1977) research, Campbell and Kracaw (1980) emphasize that financial intermediation carries out functions of information production, but they highlight that on its own it does not reduce problems of moral risk.

10 The demanded collateral functions as a signalling mechanism because credit applications with lower risk of default are willing to offer greater collateral even if they prefer lower active rates.

11Additionally, the authors explore the pertinence of the Modigliani-Miller Theorem in contexts of asymmetry of information. This theorem indicates that the way in which a company is financed (either debt or capital) does not affect its market value. Leland and Pyle (1977) believe that if there are elevated transaction costs, changes in the percentage of debt provide information to the market about possible changes in yields.

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PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 194 July-September 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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