Response to "A Note on the Nonexistence of a Rationing Equilibrium in the Besanko-Thakor Model."

Clemenz's 1993 comment criticizes our 1987 paper in two ways: first, a Nash equilibrium with rationing does not exist; second, allowing randomization across credit contracts changes the equilibrium from our 1987 paper. We respond as follows. First, our rationing equilibrium is a sequential equilibrium when informed borrowers move first. Moreover, it is a Riley reactive equilibrium when uninformed banks move first and have an infinitesimally positive cost of offering contracts. Second, equilibria with augmented strategy spaces often differ from equilibria with simpler strategy spaces. It is no surprise this is true in our paper. However, the augmentations suggested by Clemenz is institutionally unappealing. Copyright 1993 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.