Document Type

Other

Publication Date

2012

Abstract

The seminal credit market model of Stiglitz and Weiss (1981) proposes that asymmetric information between borrowers and lenders creates a moral hazard in which borrowers to have an incentive to invest in risky projects, creating the basis for a rationing equilibrium in credit markets. Other recent behavioral work, argues that a different type of behavior is more central to credit market risk: the temptation for borrowers to use borrowed capital to meet short-term consumption needs rather than for productive investment (Banerjee and Mullainathan, 2010). In this note, we present a simple model that is able to explain credit rationing where present-bias, rather than an incentive to undertake risky projects, characterizes the root source of risk under asymmetric information in credit markets.

Comments

Working Paper.

Download

Included in

Economics Commons

Share

COinS