Firm Heterogeneity, Internal Finance, and `Credit Rationing'

Abstract

Assessing the extent to which agents or firms face capital-market imperfections and quantity restrictions on credit is crucial for measuring intertemporal tradeoffs in consumption or the cost of capital for investment. In contrast to standard price-clearing, "full-information" models of loan markets, in models of credit allocation where information is imperfect (which we describe as "information-intensive"), "the interest rate" need not reflect the shadow price of credit in financial intermediation. Credit rationing to some borrowers is likely.