Does credit rationing imply insufficient lending?

Meza, David de; Webb, David C.

doi:10.1016/s0047-2727(99)00099-7

Cited by 78 publications

(39 citation statements)

References 16 publications

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“…The proof of Lemma 2 is straightforward from inspection of (7) and (8). The derivative 0 (r) < 0 means that good types bene…t from a fall in the interest rate r more than bad types do.…”

Section: Entrepreneurial Consumption Level / Net Returnsmentioning

confidence: 98%

“…Intuitively, given a set of credit contracts, any contract that maximises net returns for (1) must also necessarily maximise expected net returns for (2) (since, in the presence of limited liability and no collateral, expected net returns when (2) holds are proportional to net returns when (1) prevails). 8 Given the set of active sectors at time t, A t [0; 1], we may split the population alive during t in two disjoint subsets: the …rst subset composed by all those types-i 2 [0; 1], such that sector i 2 A t ; the second one by all those types-j 2 [0; 1], such that sector j = 2 A t . The …rst group of agents would be able to exploit fully their intrinsic skills, whereas the second one have to specialise in a sector for which they are not (exceptionally) talented.…”

Section: Credit Market Equilibrium Contractsmentioning

confidence: 99%

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Sectoral differentiation, allocation of talent, and financial development

Jaimovich

2011

Journal of Development Economics

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I present a theory of development in which heterogeneously talented entrepreneurs require credit to start new projects and open new sectors. During development the variety of sectors expands, which allows better sorting of entrepreneurial talent. The paper shows that, in addition to increasing the average productivity of matches between agents and sectors, this process also mitigates informational frictions in the …nancial markets. Furthermore, the impact of sectoral variety on the operation of …nancial markets gives rise to an interesting feedback between …nancial development and R&D e¤ort, which may lead to di¤erent types of dynamics. A successful economy exhibits a progressive increase in the variety of sectors, which in turn enhances the operation of …nancial markets. However, a poverty trap may also arise. This situation is characterised by a rudimentary productive structure with poor matching of skills to activities and severely ine¢ cient credit to talented entrepreneurs.

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“…The proof of Lemma 2 is straightforward from inspection of (7) and (8). The derivative 0 (r) < 0 means that good types bene…t from a fall in the interest rate r more than bad types do.…”

Section: Entrepreneurial Consumption Level / Net Returnsmentioning

confidence: 98%

Section: Credit Market Equilibrium Contractsmentioning

confidence: 99%

Sectoral differentiation, allocation of talent, and financial development

Jaimovich

2011

Journal of Development Economics

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“…Here, I shall con…ne myself to a selection of papers that are closely relevant to mine. The idea behind this paper is motivated by de Meza and Webb (2000) who show that sometimes the most e¤ective policy is to subsidize the (exogenous) outside option to entrepreneurship.…”

Section: Literature Reviewmentioning

confidence: 99%

Occupational choice and the quality of entrepreneurs

İnci

2013

Journal of Economic Behavior & Organization

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This paper focuses on the quality of entrepreneurs when individuals, who di¤er in terms of entrepreneurial ability and wealth, choose between entrepreneurship and wage-earning. A loan is required to become an entrepreneur. Four wealth classes form endogenously. Banks' inability to identify the ability of individuals leads them to o¤er pooling contracts to the poor and the lower-middle classes. Regardless of ability, all poor class individuals become workers and all lower-middle class individuals become entrepreneurs. Banks are able to o¤er separating contracts to the upper-middle and the rich classes. High-ability individuals in these wealth classes become entrepreneurs and their low-ability counterparts become workers. Equilibrium contracts may entail cross-subsidies within or between occupations. In some economies, a small success tax on entrepreneurs used to subsidize workers can increase the average quality of entrepreneurs and welfare by changing the thresholds of the wealth classes. In some others a reverse policy is required. Since the aggregate level of investment is …xed, the reason for these policies is not under-or overinvestment by entrepreneurs, as it often is in previous literature.Keywords: adverse selection; entrepreneurship; general equilibrium contract theory; moral hazard; occupational choice; success tax; wage subsidy JEL Classi…cation: D43; D82; H25; L26

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“…The common theoretical explanation for credit rationing vis-a-vis newly founded firms is a severe lack of observable and verifiable information about the entrepreneur's type, her plans, and the risks associated. The asymmetry of information on the entrepreneur's type and behavior will potentially lead to agency problems: adverse selection and moral hazard (Leroy and Singell [1987]; Boadway et al [1998] Burke, FitzRoy, and Nolan [2002]; CGW: Coopers, Gimenogascon, and Woo [1994]; C; Cressy [1996]; EJ: Evans and Jovanovic [1989]; HJR: Holtz-Eakin, Joulfaian, and Rosen [1994a]; LO: Lindh and Ohisson [1996]; T: Taylor [1999]; vP: Van Praag [2003]; CTM: Cowling, Taylor, and Mitchell [2004], Meza and Webb [2000]). The foresight of these problems might prevent the start of ventures.-'…”

Section: Theorymentioning

confidence: 99%

“…To prevent adverse selection in actual credit markets, the point of departure is not credit rationing in response to the hidden type problem but "redlining" instead. Redlining, screening, or credit scoring (De Meza and Webb [2000]) involves capital suppliers to use selection procedures based on a set of indicator variables for the expected performance of entrepreneurs and their projects. Those failing to score sufficiently high on the criteria are denied credit.…”

Section: Theorymentioning

confidence: 99%