Rationing versus collateralization in competitive and monopolistic credit markets with asymmetric information

This paper analyzes the structure of loan contracts comprising interest rate, loan size and collateral requirements in competitive and monopolistic credit markets with asymmetric information when debtors are risk averse. Using a similar but more general framework than former papers on this topic, it is argued that results obtained in the Literature so far are largely driven by assuming technological indivisibilities or universal risk neutrality or both. Whatever market structure is assumed to prevail, the generalized model implies that some borrowers always receive a smaller loan and invest at a smaller scale than with perfect information. In the competitive case, loan size rationing and self-selection of risks are shown to co-exist in equilibrium, even though full funding of all investment projects is feasible and socially desirable. (C) 1997 Elsevier Science B.V.