TY  - JOUR
AU  - Gale,William G.
TI  - Collateral, Rationing, and Government Intervention in Credit Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 3024
PY  - 1989
Y2  - July 1989
UR  - http://www.nber.org/papers/w3024
L1  - http://www.nber.org/papers/w3024.pdf
N1  - Author contact info:
William Gale
Brookings Institution
1775 Massachusetts Avenue, NW
Washington, DC 20036
Tel: 202/797-6148
Fax: 202/797-6181
E-Mail: wgale@brookings.edu
M1  - published as William G. Gale. "Collateral, Rationing, and Government Intervention in Credit Markets," in R. Glenn Hubbard, editor, "Asymmetric Information, Corporate Finance, and Investment" University of Chicago Press, 1990 (1990)

AB  - This paper analyzes the effects of government intervention in credit markets when lenders use collateral, interest, and the probability of granting a loan as potential screening devices. Equilibria with and without rationing are examined. The principal theme is that credit policies operate through their effect on the incentive compatibility constraint, which inhibits high-risk borrowers from mimicking the behavior of low-risk borrowers. Any policy that loosens (tightens) the constraint raises (reduces) efficiency. Most government credit programs explicitly attempt to fund investors that cannot obtain private financing. In the model presented here, these subsidies increase the extent of rationing and reduce efficiency. In contrast, policies that subsidize the nonrationed borrowers, or all borrowers, are efficiency enhancing, and reduce the extent of rationing.
ER  -