Moral hazard contracting and credit rationing in opaque credit markets

We make a first step in the literature to analyse a hybrid model of credit rationing with simultaneous presence of adverse selection and moral hazard. Motivated by the observation that credit markets in less-developed countries are rather opaque owing to the lack of necessary institutions to facilitate information sharing among lenders, we re-examine the issue of credit rationing in such an environment. For a range of different parameter values, we fully characterise the subgame perfect equilibria (SPE) of the loan contracting game. Under certain parameter values, there is type-II credit rationing for some borrowers and credit forcing for others. Credit forcing is shown to be efficient in a constrained sense. The results are contrasted with those in DeMeza and Webb (1992).