Quarterly Journal of Economics Vol. 101 No. 3 1986

The Allocation of Credit and Financial Collapse

N. Gregory Mankiw^1,2

¹ National Bureau of Economic Research · ² Harvard University

Abstract

This paper examines the allocation of credit in a market in which borrowers have greater information concerning their own riskiness than do lenders. It illustrates that (1) the allocation of credit is inefficient and at times can be improved by government intervention, and (2) small changes in the exogenous risk-free interest rate can cause large (discontinuous) changes in the allocation of credit and the efficiency of the market equilibrium. These conclusions suggests a role for government as the lender of last resort.

DOI

10.2307/1885692

Volume

101

Issue

3

Pages

455

Sources

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