Rationing or Restrictions in an Equilibrium Model of Investment Loans

Banks supply loans for firms to enter an industry. They choose between credit restrictions, where firms' decisions are limited by contract, and credit rationing. These are both ways to avoid firmsÕ moral hazard. An equilibrium is described in both approaches. The two equilibria are compared and analysed, and either may occur depending on parameter values. Thus in some situations a credit rationing equilibrium may be observed while in others a credit restriction equilibrium may exist. Extensions include the derivation of incentives for banks to improve restrictions or controls and analysis of the case where temptations change endogenously.