Chapter 16 Credit rationing Credit markets differ from standard markets in two important respects. First standard markets which are the focus of classical competitive theory involve a number of agents who are buying and selling a homogeneous commodity. Second in standard markets the delivery of a commodity by a seller and payment for the commodity by a buyer occur simultaneously. The analysis of credit allocation can go astray in trying to apply the standard supply and demand model that is not very appropriate for the market for promises. In the United States a complicated decentralized and interrelated set of financial markets institutions and instruments have evolved to provide credit. Credit rationing focuses on one set of these instrumentsloan contractswhere the promised repayments are fixed amounts. At the other extreme equity securities are promises to repay a given fraction of a firms profits. A spectrum of securities including convertible bonds and preferred shares exists between loans and equity.