Take Action

Home | Faculty & Research Overview | Research

Research Details

Competition, Collateral, and Sorting Equilibria in the Credit Market, International Economic Review


Lenders usually know less than borrowers about payoff-relevant borrower attributes. These attributes may be a personal characteristic as in Jaffee-Russell [1976] or some parameter of an earnings distribution as in Stiglitz-Weiss (S-W) [1981]. In either case, the informational asymmetry is likely to affect the credit market equilibrium. The principal objective of this paper is to explore the role of market structure in credit allocation when there is such an informational asymmetry. The questions to which we seek answers are: Why do lenders sometimes ration credit even when deposit availability is relatively unconstrained? What is the economic function of collateral and how is its usefulness affected by credit market structure? What is the impact of collateral on credit rationing? Why do we observe cosigners? These issues are analyzed under two market structures. In Section 2, we assume that a bank acts as a price-setting monopolist in the loan market. Two principal results are obtained. First, collateral will not be used unless it is sufficiently valuable to the bank to make the loan riskless. Second, in some cases, the bank's credit policy discourages high-risk borrowers from applying for credit. The bank need not explicitly reject these applicants; it simply raises the loan interest rate to induce them to exit the market.




David Besanko, Anjan V. Thakor

Date Published



Besanko, David, and Anjan V. Thakor. 1987. Competition, Collateral, and Sorting Equilibria in the Credit Market. International Economic Review. 28(3): 671-690.


Explore leading research and ideas

Find articles, podcast episodes, and videos that spark ideas in lifelong learners, and inspire those looking to advance in their careers.
learn more


Review Courses & Schedules

Access information about specific courses and their schedules by viewing the interactive course scheduler tool.


Discover the path to your goals

Whether you choose our Full-Time, Part-Time or Executive MBA program, you’ll enjoy the same unparalleled education, exceptional faculty and distinctive culture.
learn more

Take Action