On The Microscopic Mechanism Of Credit Rationing

Credit rationing is a common phenomenon in credit market,which refers to the scenario that the request of borrowers is refused or is fulfilled only partially. There are generally two types of credit rationing, the non-equilibrium rationing and equilibrium rationing. The former originates from financial regulation of the monetary authority or external influence, which is similar to the rationing in the commodity market. The latter arises from the rational choices by commercial banks to maximize their profit. By the traditional economic theory with new classical economics as representation, credit rationing appears only if there is external interference such as price control in credit market. It is a temporary non-equilibrium state, the market can be cleared by the adjustment of interest rate. Nevertheless, in reality there is often credit rationing everywhere. So it cannot be regarded as a temporary phenomenon. Subsequently, economists gradually realized that the long lasting credit rationing in the market is actually an equilibrium phenomenon.In the credit rationing theory of the new Keynes doctrine, the mechanism of both interest rate and rationing are considered to have impact in the credit market. Interest rates have both the incentive and selective effect. In the presence of information asymmetry , adverse selection and moral hazard caused by the dual effect of interest rates is the fundamental reason of credit rationing. At the microscopic level, commercial banks use credit rationing as a protective measure for their credit supply in case of information asymmetry. At the macroscopic level, credit rationing provides an alternative transmission channel of monetary policy to interest rate that connects financial markets with total demand. This may accelerate the degree of economy recession or extend and prolong their duration, and partially offset the effectiveness of macroscopical economic policies.Existing economic models for credit rationing have shown the mechanism on the formation and impact of credit rationing from different aspects such as information asymmetry, collateral effects, and supervision cost. The expansion and improvement for these models can further enrich the credit rationing theory. The relationship between banks and enterprises has significant influence on credit rationing. The implicit contract and relational financing, both of them based on long-term cooperation between banks and enterprises, not only enhances the chance for enterprises to get a loan, but also helps reduce transaction cost. Enterprise’s reputation is also an important condition for improving the financing environment. The banks’credit decision mechanism to risk aversion helps reduce credit risk due to information asymmetry. In the credit markets of incomplete information, borrowers and lenders are game objects each other. In the gambling process, between the banks and the enterprises, there always exists the possibility that enterprises are in default on a loan, so the banks use credit rationing as means to restrain the enterprises. In the repeated game, the banks and enterprises’choices tend to reach an equilibrium solution due to their interaction.Collateral mortgage could prevent adverse selection and moral hazard in the credit market to some extent, and could help ease credit rationing, under the condition that the borrowers must be able to provide sufficient mortgage security and that there exists an effective guarantee system. Meanwhile, excessive collateral mortgage requirement may lead to new adverse selection. Like interest rate, mortgage security has both positive and reverse selection effect. Banks can determine the appropriate collateral level by balancing the impact of the two.Incorporating the idea of option into research on credit rationing can lead to new results that will be different from classical credit rationing theory. From the perspective of option theory, enterprises may postpone their decision on their investment until more information is available. In this way enterprises can reduce their investment risk and collateral mortgage requirement on highly risky projects. In addition, they many get more profit from this process. Finally, credit rationing can be eliminated to certain degree.Overall, credit rationing equilibrium is merely a local equilibrium achieved from banks’maximization of profits. To the banks, credit rationing is their rational behavior. But to the society, credit rationing implies the deviation of a local equilibrium from Pareto optimality. So the government should take appropriate intervention measures to improve the welfare of the society.Besides the traditional collateral mortgage, other institutional arrangements also have certain impact on reducing credit rationing and improving the financing environment. These include the establishment of borrowers alliance, implementation of loan commitment, development of financing based on long-term collaboration, regulation and development of private finance, development of small and medium-sized financial institutions, information sharing among banks, establishment of loan insurance system, and net requirements,etc.This dissertation consists of eight chapters and epilogue. Chapter one is introduction, which summarizes significance, means, and structure of the dissertation. In addition, it presents a brief review on credit ration. Chapter two reviews the development credit rationing theory in a chronological order. Chapter three analyzes the formation mechanism of credit rationing and its economic effect. Chapter four focuses on the extension of basic model for credit rationing. Chapter five analyzes the individual behavior of banks and enterprises in credit rationing process. Chapter six studies financing game process between banks and enterprises in credit markets. Chapter seven investigates collateral mortgage mechanism in credit marks with information asymmetry. Chapter eight discusses the relationship between credit rationing and investment timing from the perspective of options. Finally, there is a conclusion part of the dissertation, which briefly evaluates the phenomenon and theory of credit rationing from the micro level, summarizes the observations from credit rationing theory, and proposes several system arrangements to ease credit rationing. It also points out the imitations of the dissertation and puts forward the directions of further research.