Equilibrium Credit Rationing

Resourceful financing by new firms : the use of multiple credit sources

“…This suggests that good entrepreneurs may not be able to easily access external funds even when the new firm is a positive net present value project. Basically, lenders either do not lend enough to a viable borrower or do not lend at all to them (Jaffee & Stiglitz, 1990;Keeton, 1979). This is a market failure, as lenders, if their goal is to maximize profit, should lend to viable borrowers if they represent a positive net present value project; the loan will be repaid.…”

“…Credit rationing occurs when firms needing external financing for positive net present value projects either do not obtain all the money they need (Type I) or do not obtain any of the money they need (Type II) to implement the project (Jaffee & Stiglitz, 1990;Keeton, 1979 , 1989;Holtz-Eakin et aI., 1994a, 1994bLindh & Ohlsson, 1996). Pure credit rationing involves competition between banks which keep interest rates low and then randomly select which applicants get loans (Stiglitz & Weiss, 1981).…”

“…In addition, founders might not be truthful in releasing this infonnation as: a) they have the incentive to overstate their abilities, and/or b) they might not be willing to reveal specific infonnation about their innovation since that infonnation can be expropriated by outsiders. Thus, banks may ration credit to finns due to infonnation asymmetry (Jaffee & Russell, 1976;Jaffee & Stiglitz, 1990;Keeton, 1979;Stiglitz & Weiss, 1981), and the rationing problem is more prevalent for new finns than older finns.…”

“…Credit rationing could inhibit a new finn's growth and survival, since this means that banks will not lend money, or will lend less than the optimal amount, to positive net present value projects (Becchetti, Garcia, & Trovato, 2011;Jaffee & Russell, 1976;Jaffee & Stiglitz, 1990; Keeton, 1979;Stiglitz & Weiss, 1981). With the possibility that creditors ration credit and turn down requests for all or part of the requested funds by viable new finns that objectively should be able to service the debt, new finns will be less able to successfully operate and grow.…”

“…Using multiple credit sources could provide access to additional debt capital 4 Type I credit rationing is defined as credit rationing that occurs when a partial amount of credit that is desired is provided by the creditor. In other words, the amount of credit that is extended by a creditor is positive but below the level that maximizes the firm's profit (Gale & Hellwig, 1985;Keeton, 1979). This is as opposed to Type II credit rationing which is the case where only a fraction ofthe applicants are able to obtain credit (Keeton, 1979;Stiglitz & Weiss, 1981).…”