Credit Rationing: Understanding Loan Market Equilibrium

This lecture delves into credit rationing, where lenders refuse credit at posted prices, leading to unsatisfied demand. The reasons behind credit rationing, such as adverse selection and moral hazard, are explored. Equilibrium in the credit market is analyzed, showing how banks maximize profit by setting interest rates. The concept of credit rationing due to moral hazard is discussed, highlighting how misaligned incentives can lead to inefficient investment choices. The lecture concludes with a discussion on relationship banking in financial intermediation.