Moral Hazard Contracting and Credit Rationing in Opaque Credit Markets

Abstract

We make a first step in the literature to analyze a hybrid model of credit rationing with simultaneous presence of adverse selection and moral hazard. Motivated by the observation that credit markets in less developed countries are rather opaque due to the lack of necessary institutions to facilitate information sharing among lenders, we re-examine the issue of credit rationing in such an environment. For a range of different parameter values we fully characterize the sub game perfect equilibria of the loan contracting game. Under certain parameter values there is type II credit rationing for some borrowers and credit forcing for others. Credit forcing is shown to be efficient in a constrained sense. The results are contrasted with those in DeMeza and Webb (1992).