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 | Stiglitz & Weiss
(1981) Credit Rationing |
| Monti-Klein Banking Competition Model and Generalizations |
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The implementation is inspired by a description in
Matthews & Thompson (2008), 'The Economics of Banking', 2nd edition, Wiley,
p. 122, Box 8.3.
This model is one of the standard models describing a potential cause for
credit rationing. Credit rationing troubles economists as basic supply and
demand analysis would call for the existence of a equilibrium rate of
interest at which all borrowers can get obtain loans.
In this model, the interest rate produces not only a direct positive
effect on the bank's profit. There is a negative effect by the level of
interest charged as good quality borrowers are driven out of the market as
they find it no longer economical borrowing money at the high rate (they
invest into so called 'safe deposit'). The loans get more risky on average
and create what is called an 'adverse selection problem'. Moreover, the
greater the rate of interest charged, the greater the incentive to take on
riskier projects. This is called an 'adverse incentive problem'.
The model implementation comes in two versions. The discrete version uses discrete loan quality categories (probability of success for project of borrower category i is pi) while the continuous version models the probability density function of pi as a continuous beta distribution of the typical shape (many good projects with high pi but there is a fat tail of risky low pi projects at the left).
The model uses VBA code (mainly for the numerical integration with the Simpson method).
Reference: Stiglitz, J. E., & Weiss, A. (1981). Credit Rationing in Markets with Imperfect Information. The American Economic Review, 71(3), 393-410. http://www.jstor.org/stable/1802787
The implementation of this model is again inspired by a description in Matthews & Thompson (2008), 'The Economics of Banking', 2nd edition, Wiley, Chapter 6: The Theory of the Banking Firm, p. 77-91.
The file is called 'Theory of the Banking Firm' and implements some of the standard 'curve shifting' competition models used in intermediate economics for illustration. Download the slides associated with this lecture to see some of the assumptions in these numerical examples. VBA is just used for the little function which displays the formula of an adjacent cell for illustration. Note that this is very much a 'working model' which is bound to have errors.
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