Background
Credit rationing is a phenomenon in lending markets whereby lenders restrict the amount of credit offered, not through price mechanisms (interest rates) but through qualitative restrictions. This practice persists even when potential borrowers are willing to pay the prevailing interest rate offered by lenders.
Historical Context
Credit rationing has been recognized and studied in the field of economics for decades. It became a more formally analyzed concept in the post-World War II period with the development of more sophisticated models of imperfect information and adverse selection in financial markets.
Definitions and Concepts
Credit Rationing: The practice where lenders do not make loans to all willing borrowers, even those prepared to pay the interest rate demanded. It usually occurs in markets where lenders are unable to perfectly discriminate between high-risk and low-risk borrowers and where borrowers may have limited liability on defaulted loans.
Major Analytical Frameworks
Classical Economics
Classical economics traditionally assumes perfect information and thus, does not directly account for credit rationing. Classical theory primarily focuses on market-clearing prices.
Neoclassical Economics
Neoclassical approaches recognize credit rationing under market imperfections such as information asymmetries. They suggest increasing interest rates as a solution, although credit rationing occurs when increased rates could lead to adverse selection.
Keynesian Economics
Keynesian theory acknowledges credit market imperfections, viewing credit rationing as of hindrance to aggregate demand and thus economic stability. Credit rationing can occur due to lenders’ risk aversion and imperfect information which exacerbate economic downturns.
Marxian Economics
Marxian economics does not extensively discuss credit rationing explicitly, but it examines financial markets for inherent inequalities and the tendency of capital accumulation, sometimes explaining restricted access to credit as a reflection of broader systemic inequities.
Institutional Economics
Institutional economics recognizes the role of institutions and norms in causing credit rationing. These frameworks emphasize regulatory and institutional deficiencies that might lead to rationed credit supply.
Behavioral Economics
Behavioral economics considers cognitive biases in both lenders and borrowers, which can contribute to credit rationing. For instance, over- or under-estimation of risk by lenders due to behavioral biases can lead to indiscriminate rejection of loan applications.
Post-Keynesian Economics
Post-Keynesian analysis emphasizes the role of financial institutions and their balance-sheet health affecting their lending capacity. Credit rationing is seen as a function of financial instability.
Austrian Economics
Austrian theory would attribute credit rationing to failures in the signaling mechanisms within the credit market, often as a result of government intervention rather than intrinsic market faults.
Development Economics
In development economics, credit rationing is frequently observed in less-developed financial markets where institutional mechanisms to assess and mitigate risk are weaker, limiting access to necessary capital.
Monetarism
Monetarists might argue that credit rationing reflects tight monetary policy and insufficient money supply, influencing the availability of loans.
Comparative Analysis
Credit rationing occurs more prominently in markets where information asymmetry is compounded by lender risk aversion. Comparative studies between lending markets often reveal credit rationing as a crucial barrier to capital access, especially among small businesses and individual borrowers in underdeveloped economies.
Case Studies
Several case studies help illustrate the application and impact of credit rationing:
- SMEs in Emerging Markets: Credit rationing’s effects on Small and Medium-sized Enterprises (SMEs) in countries with poorly developed financial sectors.
- Post-Financial Crisis Lending Practices: Real-world examination post-2008 financial crisis, assessing how banks ration credit amidst uncertainty and regulatory changes.
- Agricultural Credit Policies: Study of credit rationing in developing countries’ agricultural sector, highlighting the role of state and non-state actors.
Suggested Books for Further Studies
- “Information Economics and Policy” by Michael J. Orlando
- “Credit Risk Modeling: Theory and Applications” by David Lando
- “Fundamentals of Credit and Credit Analysis: Corporate Credit Analysis” by Arnold Ziegel
Related Terms with Definitions
- Asymmetric Information: A situation where one party in a transaction has more or better information than the other.
- Adverse Selection: A process in which undesired results occur when buyers and sellers have access to different information, often leading higher-risk individuals to participate.
- Moral Hazard: Occurs when a party engages in risky behavior knowing that it is protected against the risk because another party will incur the cost.
- Interest Rate: The amount charged by lenders to borrowers for the use of assets, expressed as a percentage of the principal.
Such a structure comprehensively covers the conceptual and empirical dimensions of credit rationing, using multidisciplinary economic perspectives.
