On the Possibility of Credit Rationing in the Stiglitz-Weiss Model: A Comment

The model of Stiglitz and Weiss ( American Economic Review , 1981, 71(3)) is the seminal analytical work on credit rationing. However, in a recent paper, Arnold and Riley ( American Economic Review , 2009, 99(5)) claim that the distributional assumption on which that model.s main result depends cannot hold. This paper shows that Arnold and Riley.s result is an outcome of their implicit assumption of a one-period Bertrand game between banks. In more realistic modes of bank competition, in which banks have some degree of monopoly power, Stiglitz and Weiss.s result can hold.