Analyze the role of credit rationing in both a developed country and a less-developed country. How does the role of credit rationing influence economic growth and employment in these two countries?
Solution
Credit rationing is an action taken by lending institutions to limit or deny credit based on a borrowers\' creditworthiness and an overload of loan demands. Interest rates trending either up or down lead to credit rationing. An example of credit rationing is increasing interest rates about current market rates. Credit rationing IS a pervasive phenomenon. There are two different forms of quantity constraints:
micro credit rationing, this places credit limits on borrowers,
and macro credit rationing, this randomly denies access to any credit to a fraction
of borrowers. The second form has asymmetric treatment of otherwise identical
agents. Both forms of rationing can coexist, and play complementary
yet distinct roles. It becomes clear that the second form of rationing gains in
importance when the information flow within the lending community is poor (thus
defaulters have a fair chance for escaping detection).
One lesson that comes from both debt overhang and enforcement theories is
that the distribution of bargaining power among lenders and borrowers has strong implications
for the degree of credit rationing, effort levels as well as efficiency. The effect is
similar in both cases
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Analyze the role of credit rationing in both a developed country and a.docx
1. Analyze the role of credit rationing in both a developed country and a less-developed
country. How does the role of credit rationing influence economic growth and employment
in these two countries?
Solution
Credit rationing is an action taken by lending institutions to limit or deny credit based on a
borrowers' creditworthiness and an overload of loan demands. Interest rates trending either up or
down lead to credit rationing. An example of credit rationing is increasing interest rates about
current market rates. Credit rationing IS a pervasive phenomenon. There are two different forms
of quantity constraints:
micro credit rationing, this places credit limits on borrowers,
and macro credit rationing, this randomly denies access to any credit to a fraction
of borrowers. The second form has asymmetric treatment of otherwise identical
agents. Both forms of rationing can coexist, and play complementary
yet distinct roles. It becomes clear that the second form of rationing gains in
importance when the information flow within the lending community is poor (thus
defaulters have a fair chance for escaping detection).
One lesson that comes from both debt overhang and enforcement theories is
that the distribution of bargaining power among lenders and borrowers has strong implications
for the degree of credit rationing, effort levels as well as efficiency. The effect is
similar in both cases
