This excerpt of the Stiglitz-Weiss (1981)'s Introduction shows better that 'credit iguales' = equilibrium in the credit market


Credit Rationing in Markets with Imperfect Information

By JOSEPH E. STIGLITZ AND ANDREW WEISS*


Why is credit rationed? Perhaps the most basic tenet of economics is that market equilibrium entails supply equalling demand; that if demand should exceed supply, prices will rise, decreasing demand and/or increasing supply until demand and supply are equated at the new equilibrium price. So if prices do their job, rationing should not exist. However, credit rationing and unemployment do in fact exist. They seem to imply an excess demand for loanable funds or an excess supply of workers.

One method of "explaining" these conditions associates them with short- or long-term disequilibrium. In the short term they are viewed as temporary disequilibrium phenomena; that is, the economy has incurred an exogenous shock, and for reasons not fully explained, there is some stickiness in the prices of labor or capital (wages and interest rates) so that there is a transitional period during which rationing of jobs or credit occurs. On the other hand, long-term unemployment (above some "natural rate") or credit rationing is explained by governmental constraints such as usury laws or mini­ mum wage legislation.1

The object of this paper is to show that in equilibrium a loan market may be characterized by credit rationing. Banks making loans are concerned about the interest rate they receive on the loan, and the riskiness of the loan. However, the interest rate a bank charges may itself affect the riskiness of the pool of loans by either: l) sorting potential borrowers (the adverse selection effect); or 2) affecting the actions of borrowers (the incentive effect). Both effects derive directly from the residual imperfect information which is present in loan markets after banks have evaluated loan applications. When the price (interest rate) affects the nature of the transaction, it may not also clear the market.

The adverse selection aspect of interest rates is a consequence of different borrowers having different probabilities of repaying their loan. The expected return to the bank obviously depends on the probability of repayment, so the bank would like to be able to identify borrowers who are more likely to repay. It is difficult to identify "good borrowers," and to do so requires the bank to use a variety of screening devices. The interest rate which an individual is willing to pay may act as one such screening device: those who are willing to pay high interest rates may, on average, be worse risks; they are willing to borrow at high interest rates because they perceive their probability of repaying the loan to be low. As the interest rate rises, the average "riskiness" of those who borrow increases, possibly lowering the bank's profits.

Similarly, as the interest rate and other terms of the contract change, the behavior of the borrower is likely to change. For instance, raising the interest rate decreases the return on projects which succeed. We will show that higher interest rates induce firms to undertake projects with lower probabilities of success but higher payoffs when successful.