A Theory and Test of Credit Rationing: Comment

Abstract

This article presents the authors' comments on the paper A Theory and Test of Credit Rationing, by Dwight Jaffee and F. Modigliani, published in the December 1969 issue of the American Economic Review journal. One frequently encounters the casual empirical conclusion that some consumers and firms are not able to borrow as much as they would like at market rates of interest. The existence of these rejected offers to pay market rates of interest is then said to constitute credit rationing. Marshall Freimer and Myron Gordon, in addition to Jaffee and Modigliani, assume that rejected market interest rate offers exist and then attempt to explain why lenders might engage in such credit rationing. Our analysis begins by questioning the prevalent identification of credit rationing with rejected offers to pay market rates of interest. This concept of credit rationing is apparently derived by analogy with the theory of commodity markets under certainty. In that theory, any economic agent who makes an effective demand for a commodity, that is, who offers to pay its market price, is subject to nonprice commodity rationing if his demand is not supplied. The common extension of this conclusion to credit markets is that any economic agent who offers to pay the market rate of interest on some type of loan is subject to credit rationing if his demand for credit is not supplied. We argue that this concept of credit rationing is not useful because it is based on an inappropriate implicit assumption that an offer to pay the market rate of interest on a loan constitutes an effective demand for credit.

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