RATIONING VERSUS COLLATERALIZATION IN COMPETITIVE AND MONOPOLISTIC CREDIT MARKETS WITH ASYMMETRIC INFORMATION

This paper analyzes the structure of loan contracts comprising interes t rate, loan size and collateral requirements in competitive and monop olistic credit markets with asymmetric information when debtors are ri sk averse. Using a similar but more general framework than former pape rs on this topic, it is argued that results obtained in the Literature so far are largely driven by assuming technological indivisibilities or universal risk neutrality or both. Whatever market structure is ass umed to prevail, the generalized model implies that some borrowers alw ays receive a smaller loan and invest at a smaller scale than with per fect information. In the competitive case, loan size rationing and sel f-selection of risks are shown to co-exist in equilibrium, even though full funding of all investment projects is feasible and socially desi rable. (C) 1997 Elsevier Science B.V.