Credit markets with imperfect information: Risk-aversion versus pessimism

Abstract

Stiglitz and Weiss (1981) credit rationing is embedded within rank dependent expected utility theory. Our results show that sufficient pessimism or sufficient risk-aversion by borrowers may eliminate adverse selection. Moreover, lender optimism may eliminate credit rationing even when adverse selection exists.
Citation

Arcand J-L., Mc Donald S. (2018) "Credit Markets with Imperfect Information: Risk-Aversion versus Pessimism," Economics Letters, vol. 165, pp. 35-38.