Rationing is a pervasive feature of credit markets. It has been suggested that credit rationing represents a suboptimal allocation of resources. In a general equilibrium model of credit rationing with hidden information and costly monitoring we show that if credit is rationed it is suboptimal...

This paper explores the implications of entrepreneurs holding biased perceptions about the probability of project success and/or the size of payoff, if successful. When entrepreneurs are optimistic only about the probability of success, credit is not rationed. Credit rationing can occur where...