Working Papers

1990

 

November 1990, No. 90-10

Liquidity Constraints in Commercial Loan Markets with Imperfect Information and Imperfect Competition

Anne P. Villamil

This paper presents a simple general equilibrium model of the commercial loan market in which liquidity constraints arise endogenously because of imperfect information and imperfect competition.  The information and market structure generate a discriminatory interest rate schedule and loan size restrictions, which we interpret as liquidity constraint phenomena.  The model's predictions are consistent with actual lending policies observed in the commercial loan industry.  Further, the lender and all borrowers are at least as well off under this solution as they would be if faced with any single interest rate policy other than the competitive rate.

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