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Efficent credit rationing

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This paper shows that credit rationing is endemic to competitive capital markets in which information is symmetrically distributed. Equilibrium contracts may restrict loans to a size well below that at which backruptcy is a threat. The model predicts that credit rationing will be most severe on projects of intermediate risk and decreases the more costly it is for creditors to recover bad debts. However, there is no case for government intervention, despite the usual identification of credit rationing as a per se capital market imperfection.

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en

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http://eprints.lse.ac.uk/35750/

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