The Allocation of Credit and Financial Collapse
NBER Working Paper No. 1786 (Also Reprint No. r0779)
This paper examines the allocation of credit in a market in which borrowers have greater information concerning their own riskiness than do lenders. It illustrates (1) the allocation of credit is inefficientand at times can be improved by government intervention, and (2) small changes in the exogenous risk-free interest rate can cause large (discontinuous) changes in the allocation of credit and the efficiency of the market equilibrium.These conclusions suggest a role for government as the lender of last resort.
Published: Mankiw, N. Gregory."The Allocation of Credit and Financial Collapse," Quarterly Journal of Economics, Vol. 101, No. 3, (August 1986), pp. 455-470.