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UBC Theses and Dissertations

Credit rationing with an individual short-side rule : estimation for business loans in Canada Crawford, Allan Charles


It is generally accepted that rationing occurs in loan markets with demand of some borrowers exceeding desired supply by lenders at prevailing interest rates. Previous empirical studies of credit rationing use established disequilibrium econometric methods to estimate structural models of business loan markets. This study argues that existing disequilibrium techniques are not suitable for analyzing credit rationing since they ignore features of loan markets emphasized in the theoretical literature. While recent theory distinguishes between equilibrium and disequilibrium categories of credit rationing, existing empirical work allows only the latter to exist. In addition the traditional empirical model does not derive loan equations from micro foundations despite a theoretical focus on loan determination at the individual borrower level. Instead, equations are constructed by assuming aggregate loan quantity corresponds to the minimum of aggregate supply and demand. These inconsistencies with theory suggest that estimates of rationing from the traditional model are unreliable. Unlike traditional methods the empirical model developed in this study derives aggregate equations from a micro approach to loan determination. Individual loan sizes are determined by the minimum of borrower-specific supply and demand functions and explicit aggregation across all borrowers gives estimating equations with desired properties. An attractive feature of the new model is that it yields the first estimates of equilibrium credit rationing. This allowance for both equilibrium and disequilibrium rationing, together with the micro foundations, means that the proposed model provides greater consistency between theoretical and applied work than has been previously possible. The new model is applied to the market for business loans from Canadian banks for the period 1968 to 1979. Results indicate that rationing is empirically significant as total rationing averages approximately one-third of aggregate flow demand for loans. Equilibrium rationing appears to be an important phenomenon since it exceeds disequilibrium rationing each period. However, intertemporal fluctuations in total rationing are caused primarily by changes in disequilibrium rationing. A comparison of the new and traditional models shows that rationing estimates are greater in the new approach with much of the difference attributable to the amount of equilibrium rationing in that model.

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