Financial constraints affect firms’ financial and productive decisions generating substantial macroeconomic implications in terms of investment, economic growth, inflation and income distribution. Despite its relevance, financial constraints are not directly observable. However, empirically...

In this paper a bank faces excess demand in the loan market, can sort loan applicants by an observable measure of quality, and faces a small but positive probability of default. The bank uses two policies to allocate credit: (i) tighten restrictions on loan quality; (ii) limit the number of...