TY - JOUR AU - Calomiris,Charles W. AU - Hubbard,R. Glenn TI - Firm Heterogeneity, Internal Finance, and `Credit Rationing' JF - National Bureau of Economic Research Working Paper Series VL - No. 2497 PY - 1990 Y2 - July 1990 UR - http://www.nber.org/papers/w2497 L1 - http://www.nber.org/papers/w2497.pdf N1 - Author contact info: Charles W. Calomiris Graduate School of Business Columbia University 3022 Broadway Street, Uris Hall New York, NY 10027 Tel: 212/854-8748 Fax: 212/316-9219 E-Mail: cc374@columbia.edu R. Glenn Hubbard Graduate School of Business Columbia University, 101 Uris Hall 3022 Broadway New York, NY 10027 Tel: 212/854-3493 Fax: 212/864-6184 E-Mail: rgh1@columbia.edu, ws2187@columbia.edu AB - Assessing the extent to which agents or firms face capital-market imperfections and quantity restrictions on credit is crucial for measuring intertemporal tradeoffs in consumption or the cost of capital for investment. In contrast to standard price-clearing, "full-information" models of loan markets, in models of credit allocation where information is imperfect (which we describe as "information-intensive"). "the interest rate" need not reflect the shadow price of credit in financial intermediation. Credit rationing to some borrowers is likely. In actual markets, many loan contracts are offered, both "full-information" and "information intensive." Our focus in this paper is on firm heterogeneity in credit markets; we analyze mechanisms by which credit markets sort borrowers in the presence of differing degrees of asymmetric information; we emphasize the potential for credit rationing in equilibrium and the response of credit allocation to borrower-specific shocks. Our approach suggests that external finance will be differentially available to entrepreneurs --holding constant their project opportunities -- according to their internal net worth position. That is, there is an important link for many firms between internal finance and investment spending. We develop a simple general equilibrium model of credit allocation, in which different loan contracts are offered to different types of borrowers. The extent to which different borrowers can obtain credit depends on the distribution of internal finance, aggregate net worth levels, and whether projects are observable. While credit restrictions to some classes of borrowers are a feature of a multiple-contract equilibrium, the severity can vary substantially in response to financial disturbances. We consider shocks to borrowers' net worth. Credit restrictions may occur in response to a deterioration of net-worth positions., A "credit collapse," in which no loans are offered to certain types of borrowers is possible. Investment and financing decisions are not, in general independent. We discuss implications for tax policy and for public policy toward financial institutions. ER -