Credit Rationing and Financial Disorder

  • Author(s): JACK GUTTENTAG, RICHARD HERRING
  • Published: Apr 30, 2012
  • Pages: 1359-1382
  • DOI: 10.1111/j.1540-6261.1984.tb04912.x

ABSTRACT

We develop a model of lender behavior in the presence of default risk and moral hazard that determines default premiums and identifies the conditions under which borrowers are rationed. A hypothesis regarding a cognitive bias in the formation of expectations provides a dynamic component to our analysis and allows us to explain how an economy becomes vulnerable to a financial crisis and why vulnerability may increase over time.

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