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Credit and Equity Rationing in Markets with Adverse Selection

Stiglitz, Joseph E.; Hellmann, Thomas F.

Previous theories of financial market rationing focused on a single market, either the credit or the equity market. An interesting question is whether credit and equity rationing are mutually compatible, and how they interact. We consider a model with two-dimensional asymmetric information, where entrepreneurs have private information about both the expected returns and the risk of their projects. We show that credit and equity rationing may occur individually or simultaneously. Moreover, competition between the two markets may generate the adverse selection that leads to rationing outcomes.



Also Published In

European Economic Review

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April 10, 2013
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