Working Paper: NBER ID: w1786
Authors: N. Gregory Mankiw
Abstract: This paper examines the allocation of credit in a market in which borrowers have greater information concerning their own riskiness than do lenders. It illustrates (1) the allocation of credit is inefficientand at times can be improved by government intervention, and (2) small changes in the exogenous risk-free interest rate can cause large (discontinuous) changes in the allocation of credit and the efficiency of the market equilibrium.These conclusions suggest a role for government as the lender of last resort.
Keywords: credit allocation; financial markets; government intervention; asymmetric information
JEL Codes: G21; E44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Asymmetric information (D82) | Inefficient equilibrium in unfettered credit market (D53) |
| Government intervention (O25) | Improved market efficiency (G14) |
| Risk-free interest rate changes (E43) | Allocation of credit (E51) |
| Risk-free interest rate changes (E43) | Market stability (D53) |
| Small changes in risk-free interest rate (E43) | Large changes in credit allocation (E51) |
| Increase in required return (G19) | Fewer loans issued (G21) |
| Required return increase (G19) | Shift in credit market equilibrium (D53) |
| Shift in credit market equilibrium (D53) | Socially productive projects not undertaken (O35) |