collateral heterogeneity in risk attitude and the credit market equilibrium abstract this paper examines the argument that the availability of collateral rules out credit rationing a model of the credit market with ex ante asymmetric information and heterogeneous entrepreneurs attitudes toward risk is set up it is shown that due to the interplay between project choice and entrepreneurs preferences using collateral as a signal to screen safer projects may prove impossible instead a partially separating two contract equilibrium with rationing at one contract emerges contrary to previous theoretical research and consistently with conventional wisdom and systematic evidence the use of collateral is never negatively correlated with project risk

collateral in credit rationing in markets with imperfect information note in their 1981 article joseph stiglitz and andrew weiss analyze adverse selection and incentive effects in the loan market the models considered are based on two crucial assumptions borrowers are subject to limited liability and lenders cannot distinguish borrowers projects of different risk stiglitz and weiss show that a bank that raises its interest rate may suffer adverse selection because only risky borrowers will be willing to borrow at the higher rate thus lenders may choose not to raise the interest rate to eliminate excess demand resulting in the possibility of a credit rationing equilibrium stiglitz and weiss also consider briefly the role of collateral in such credit rationing models they conclude that lenders may choose not to use collateral requirements as a rationing device an increase in collateral requirements like an increase in the interest rate potentially leads to a decrease in the lender s expected return on loans because of resulting adverse incentive and selection effects the purpose of this note is to further investigate the role of collateral in these models stiglitz and weiss discussion in section iii establishes that adverse selection effects can result from increases in collateral when borrowers are risk averse i will show by returning to a model they discussed earlier in section i that the adverse selection effects can also occur when borrowers are risk neutral stiglitz and weiss outline a model to consider the use of collateral as a rationing device section iii in that model all potential borrowers face the same array of risky projects each potential borrower chooses at most one of those projects to undertake the individuals are by assumption risk averse with decreasing absolute risk aversion and possess different amounts of initial wealth thus choice of project if any to undertake and the method of finance selffinance from initial wealth or loan finance will differ from one individual to the next stiglitz and weiss show that among those who undertake risky projects and who choose borrowing as the method of finance wealthier individuals undertake riskier projects an increase in collateral has two effects on the market for loans those individuals who remain in the market will choose to undertake less risky projects and those individuals who drop out of the market are less wealthy low risk borrowers if the second effect is sufficiently strong then increased collateral requirements will mean decreased expected returns for the lender thus a credit rationing equilibrium may occur since lenders may not choose to use collateral requirements or the interest rate to eliminate excess demand the adverse selection effect just described does not occur in this model if the individuals are risk neutral consequently the potential for a credit rationing equilibrium is limited to cases where borrowers are risk averse to see that increases in collateral requirements can also result in adverse selection if borrowers are risk neutral consider the model stiglitz and weiss used to analyze the adverse selection effects of increases in the interest rate section i pp 395 99 it differs from the section iii model discussed above in three ways first borrowers are risk neutral second all projects ar loan financed the analogy to the section iii model is that no individuals have sufficient wealth to self finance projects third in the section

federal lending and the market for credit abstract federal lending is an important but unrecognized feature of modern credit markets this paper analyzes the effects of credit interventions on credit allocation and economic efficiency the underlying model posits asymmetric information between borrowers and lenders and allows for market clearing rationed or redlined equilibria principal results include unsubsidized credit interventions are neutral the relative effectiveness of alternative lending instruments depends on whether rationing occurs interactions among programs can have perverse effects and even without an informational advantage the government may enact welfare improving credit policies under certain conditions

a survey of agricultural household models recent findings and policy implications semicommercial farms that produce multiple crops make up a large part of the agricultural sector in developing economies these farms or agricultural households combine two fundamental units of microeconomic analysis the household and the firm traditional economic theory has dealt with these units seperately but in developing economies in which peasant farms dominate their interdependence is of crucial importance researchers have developed models of agricultural households that combine producer and consumer behavior in a theoretically consistent fashion recent empirical applications of these models have extended them and expanded the range of policy issues which can be investigated using this general framework this article reports the results of empirical applications of this model in india indonesia japan the republic of korea malaysia nigeria senegal sierra leone taiwan and thailand it provides a comparative analysis of the policy implications of the approach for such matters as the welfare of farm households the size of marketed surplus the demand for nonagricultural goods and services and for hired labor and the availability of budget revenues and foreign exchange

competitive equilibrium in the credit market under asymmetric information abstract we study a competitive credit market equilibrium in which all agents are risk neutral and lenders a priori unaware of borrowers default probabilities admissible credit contracts are characterized by the credit granting probability the loan quantity the loan interest rate and the collateral required the principal result is that in equilibrium lower risk borrowers pay higher interest rates than higher risk borrowers moreover the lower risk borrowers get more credit in equilibrium than they would with full information no credit is rationed and collateral requirements are higher for the lower risk borrowers

the role of collateral in credit markets with imperfect information abstract the paper analyzes the structure of credit market equilibrium under imperfect information collateralization and credit rationing are compared as alternative means to cope with problems of adverse selection and moral hazard it is shown that lenders may use collateral as a self selection and incentive mechanism rationing occurs only if the borrowers collaterizable wealth is too small to allow perfect sorting or to create sufficiently strong incentives whenever there is rationing in an equilibrium some borrowers are charged the maximum amount of collateral

agricultural household models extensions applications and policy this book presents the basic model of an agricultural household that underlies most of the case studies undertaken so far the model assumes that households are price takers and is therefore recursive the decisions modeled include those affecting production and the demand for inputs and those affecting consumption and the supply of labor comparative results on selected elasticities are presented for a number of economies the empirical significance of the approach is demonstrated in a comparison of models that treat production and consumption decisions separately and those in which the decisionmaking process is recursive the book summarizes the implications of agricultural pricing policy for the welfare of farm households marketed surplus the demand for nonagricultural goods and services the rural labor market budget revenues and foreign exchange earnings in addition it is shown that the basic model can be extended in order to explore the effects of government policy on crop composition nutritional status health saving and investment and to provide a more comprehensive analysis of the effects on budget revenues and foreign exchange earnings methodological topics primarily the data requirements of the basic model and its extensions along with aggregation market interaction uncertainty and market imperfections are discussed the most important methodological issues the question of the recursive property of these models is also discussed

repossession and the democratization of credit we exploit a 2004 credit reform in brazil that simplified the sale of repossessed cars used as collateral for auto loans we show that the reform expanded credit to riskier self employed borrowers who purchased newer more expensive cars the legal change has led to larger loans with lower spreads and longer maturities although the credit reform improved riskier borrowers access to credit it also led to increased incidences of delinquency and default our results shed light on the consequences of a credit reform and highlight the crucial role that collateral and repossession play in the liberalization and democratization of credit

credit markets with imperfect information risk aversion versus pessimism abstract stiglitz and weiss 1981 credit rationing is embedded within rank dependent expected utility theory our results show that sufficient pessimism or sufficient risk aversion by borrowers may eliminate adverse selection moreover lender optimism may eliminate credit rationing even when adverse selection exists

loan contract structure and adverse selection survey evidence from uganda abstract while adverse selection is an important theoretical explanation for credit rationing it is difficult to quantify empirically many studies measure the elasticity of credit demand of existing or previous borrowers as opposed to the population at large other studies use cross sectional approaches that may confound borrower risk with other factors we circumvent both issues by surveying a representative sample of microenterprises in urban uganda and by measuring their responses to multiple hypothetical contract offers varying in interest rates and collateral requirements the two seminal theories on selection provide contradicting predictions following a change in the contractual terms under adverse selection a lower interest rate or a lower collateral obligation should increase take up among less risky borrowers by contrast advantageous selection implies that take up should increase among the riskier borrowers we test these two predictions by examining if firm owners respond to changes in the interest rate or the collateral requirement and whether higher take up varies by firms risk type we find support for the presence of adverse selection as contracts with lower interest rates or lower collateral obligations increase hypothetical demand especially for less risky firms our results imply that changes to the standard loan product available to microenterprises may have substantial effects on credit demand

pull and push individual farming in hungary this paper is motivated by the fact that part time individual farming is commonly observed among rural households in a number of transition economies but it is not clear prima facie if such resource allocation is optimal a conceptual model of household labor allocation between individual farming and off farm wage employment is developed the model explicitly accounts for the role of household endowments in labor allocation as the analysis is conditioned on the status of factor markets the hypotheses are empirically tested using 1998 data from a country representative survey of rural households in hungary an advanced transition country which only recently became eu member state results provide evidence that capital market imperfections still remain implications for the policies related to agricultural sector restructuring employment and rural development are discussed

can regulators allow banks to set their own capital ratios abstract basel regulators have received widespread criticism for failing to prevent two credit crises that hit the u s over the last two decades nonetheless banks were considerably overcapitalized prior to the onset of the 2007 2009 subprime crisis compared to those which had undergone the 1990 1991 recession therefore if capital requirements were achieved prior to the subprime crisis how could the basel framework be blamed again for having accelerated if not caused another credit crunch we find that the answer to this question lies in the relationship between the capital ratio and the leverage ratio which is governed by risk weights categories determined by the basel regulation we show that changes to risk weight categories which affect the correlation pattern between both ratios are not reflected in the subprime crisis this minimizes the implication of the basel ii regulation in the crunch that succeeded its announcement in contrast to basel i we demonstrate that these dynamics are governed by a formula linking the two ratios together which derives from the sensitivity of the risk based capital ratio to a change in its risk weight s one implication of our work regarding the basel iii regulation consists in validating the newly established capital increments in a mathematical rather than heuristical approach

equilibrium credit rationing of small farm agriculture it is often argued that externally imposed contractual restrictions lead to inequitable credit rationing this paper argues that unrestricted laissez faire markets may also inequitably ration credit a formal model which grants borrowers autonomy in credit application and use demonstrates that adverse incentive and selection effects may cause banks to endogenously impose interest rate restrictions and ration small farms out of the credit market consequently liberalization of financial markets may be insufficient to guarantee small farms access to credit

collateral and competitive equilibria with moral hazard and private information the authors examine equilibrium credit contracts and allocations under different competitivity specifications and explain the economic roles of collateral under these specifications both moral hazard and adverse selection are considered the principal message is that how a competitive equilibrium is conceptualized significantly affects the characterization of equilibrium credit contracts specifically some well known results in the rationing literature are shown to rest delicately on the adopted equilibrium concept two somewhat surprising results emerge first high quality borrowers with unlimited collateral may be priced out of the market despite the bank having idle deposits second high quality borrowers may put up more collateral this paper explores the allocational consequences of alternative credit market competitivity specifications and explains the different economic roles of collateral under these specifications we model banks that lend to borrowers financing projects with payoffs depending on a priori unknown borrower attributes and ex post unobservable borrower actions borrowers are assumed to have unconstrained access to collateral our analysis is based on two concepts of competitive equilibrium under both banks compete in the sense that they earn zero expected profits however under the first concept of equilibrium ti as in jaffee and russell 11 all rents accrue to borrowers whereas under the second concept t2 all rents accrue to depositors as in stiglitz and weiss 17 our research makes two main points first we demonstrate that the manner in which a competitive equilibrium is conceptualized importantly influences the characterization of equilibrium credit allocations specifically one of the findings is that the rationing equilibria of stiglitz and weiss 17 and others should be viewed as rather delicate things in that they are very sensitive to the competitivity specification used for instance

evaluation of credit risk based on firm performance abstract this paper investigates whether productive inefficiency measured as the distance from the industry s best practice frontier is an important ex ante predictor of business failure we use samples of french textiles wood and paper products computers and r d companies to obtain efficiency estimates for individual firms in each industry these efficiency measures are derived from a directional technology distance function constructed empirically using non parametric data envelopment analysis dea methods estimating binary and ordered logit regression models we find that productive efficiency has significant explanatory power in predicting the likelihood of default over and above the effect of standard financial indicators

adverse selection and moral hazard effects in the mortgage market an empirical analysis with imperfect information prices may have sorting and incentive effects that confound the received theory of market behavior these effects are more likely to be observed in situations where transactions extend over a lengthy period of time as in credit and labor markets hence one may observe equilibrium credit rationing or equilibrium unemployment in labor markets even though these markets are competitive and free of government regulation 7 8 in credit markets higher interest rates may adversely sort good credit risks from bad credit risks similarly higher interest rates may induce borrowers to invest in riskier projects and not to exercise due diligence in the minimization of risks moral hazard either the adverse selection or the moral hazard effects can lead to a reduction in expected profits as the interest rate rises the supply of loanable funds is an increasing function of expected profits if expected profits decline over some interval of rising interest rates then the supply of loanable funds will be concave and backward bending with regard to interest rates over that interval stiglitz and weiss identify the interest rate at which the supply function bends backward as the bank optimal interest rate 8 394 the purpose of this paper is to test the empirical implications drawn from the growing adverse selection and moral hazard literature in the home mortgage market a recent citation search reveals that the stiglitz and weiss 8 paper has been cited over one hundred and fifty times in the last nine years in his survey of the literature stiglitz notes that most of this derivative literature is theoretical and that the models have not been the subject of extensive empirical testing 7 42 the paper is organized as follows in section ii we review the adverse selection and moral hazard literature consider the characteristics peculiar to the mortgage market and identify the empirical implications section iii gives our estimates for the empirical model of the mortgage market among other results we find that mortgage supply is a concave function of the rate of

income strategies among rural households in mexico the role of off farm activities abstract off farm activities generate on average more than half of farm households incomes in the mexican ejido sector participation in these activities helps reduce poverty and contributes to greater equality in the distribution of income this paper analyzes the determinants of access to off farm sources of income across households we find that education plays a major role in accessing better remunerated nonagricultural employment adults of indigenous ethnic origin suffer from an educational lag and have less access to off farm nonagricultural employment than non indigenous adults at identical educational levels the regional availability of off farm employment strongly affects participation in addition women are differentially limited by distance to urban centers in their ability to gain off farm employment

information learning and wage rates in low income rural areas in this essay we present evidence that employers in rural areas of developing countries have imperfect information with regard to the productivity of heterogeneous workers in addition to obtaining direct measures of the completeness of employer information we consider the implications of information asymmetries for the structure of casual labor markets we then evaluate the extent to which casual labor markets do in fact exhibit these attributes we find that 1 there is adverse selection out of the time rate labor market 2 employers discriminate statistically given two workers with different observed characteristics but the same actual productivity the worker from the group with the higher average productivity will have a higher wage 3 employers exhibit learning over time the extent of employer ignorance is negatively related to labor market exposure on the part of the workers and 4 calorie consumption affects productivity but is not rewarded in the time rate labor market in concluding we argue that an analysis of wage and employment patterns and the implications of these patterns for human capital investment in rural areas of developing countries that ignored the role of information problems could yield misleading conclusions

a reexamination of credit rationing in the stiglitz and weiss model we reexamine stiglitz and weiss 1981 credit rationing by simultaneously considering adverse selection and moral hazard if returns of the projects are ranked by first order stochastic dominance neither adverse selection nor moral hazard exists if the projects have equalized expected returns moral hazard does not exist and credit rationing due to adverse selection occurs under extreme conditions if the projects are ranked by second order stochastic dominance ssd adverse selection and moral hazard may coexist logically restoring credit rationing but ssd imposes strict limitations on lenders ability to classify borrowers in general our results do not support significance of credit rationing

financial matching asymmetric information and entrepreneurial risk taking we study financial matching in credit markets when entrepreneurs have private information about their success potential entrepreneurs can search for financing for either a risky or a safe investment and only the risky project is sensitive to entrepreneurs intrinsic types there is excess risk taking in the sense that entrepreneurs with inefficiently low success probabilities choose the risky investment however steady states featuring greater market liquidity are associated with higher efficiency as market liquidity also reflects the intensity of competition among financiers earlier results which indicate a negative relationship between competition and allocative efficiency do not hold in our setup

education and off farm work an investigation is presented of the determinants of educational selectivity in a framework that emphasizes the coordination of household members sectoral time allocation is based on members comparative advantage which in turn depends on the utilization and returns to schooling in the farm and nonfarm sectors central to the model is a knowledge spillover hypothesis that workers who participate in off farm work may still contribute knowledge to farm management estimation of the model is based on cross sectional chinese farm household data collected in 1990 from 204 households in sichuan province it is concluded that schooling does not enhance labour productivity when carrying out routine tasks that the contribution to farm efficiency by the most educated members is not affected by their non farm participation and that schooling increases labour market wage rates these empirical results give comparative advantage for the better educated farmers to work off the farm

do liquidation values affect financial contracts evidence from commercial loan contracts and zoning regulation we examine the impact of asset liquidation value on debt contracting using a unique set of commercial property loan contracts we employ commercial zoning regulation to capture the flexibility of a property s permitted uses as a measure of an asset s redeployability or value in its next best use within a census tract more redeployable assets receive larger loans with longer maturities and durations lower interest rates and fewer creditors controlling for the property s type sale price and earnings to price ratio these results are consistent with incomplete contracting and transaction cost theories of liquidation value and financial structure

the effects of human capital on wages and the determinants of labor supply in a developing country abstract the heckman procedure is used to correct for sample selection bias in estimating wage offer and net labor market supply equations the findings show that wages are affected by education and experience in addition the wage offer is influenced by other genetic and environmental influences captured in the wage of one s father calories as predicted by exogenous instruments are also shown to influence the wage offer suggesting that better nutrition increases labor productivity the probability of market labor participation as well as the amount of net market labor supply declined with the size of paddy landholding in addition to the net market supply elasticity increasing with the amount of land owned and being lower for urban than rural workers

some evidence on the empirical significance of credit rationing this paper examines the credit rationing debate using detailed contract information on over one million commercial bank loans from 1977 to 1988 while commercial loan rates are sticky consistent with rationing this stickiness varies with loan contract terms in ways that are not predicted by equilibrium credit rationing theory in addition the proportion of new loans issued under commitment does not increase significantly when credit markets are tight despite the fact that borrowers without commitments can be rationed whereas commitment borrowers are contractually insulated from rationing overall the data suggest that equilibrium rationing is not a significant macroeconomic phenomenon

credit and equity rationing in markets with adverse selection previous theories of financial market rationing focussed on a single market either the credit or the equity market an interesting question is whether credit and equity rationing are mutually compatible and how they interact we consider a model with two dimensional asymmetric information where entrepreneurs have private information about both the expected returns and the risk of their projects we show that credit and equity rationing may occur individually or simultaneously moreover competition between the two markets may generate the adverse selection that leads to rationing outcomes

the relation between farm size and farm productivity the role of family labor supervision and credit constraints abstract the paper shows that if the performance of hired farmhands is affected by supervision from family members and if the availability of credit is dependent on the amount of land owned then a systematic positive or negative relationship between per acre yields and farm size will prevail a model with no supervision effects on labor productivity would predict that yields are unaffected by farm size the paper also investigates the relation between land utilization and owned holding size when land rental possibilities are limited results are shown to be compatible with various observed patterns in ldcs