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Abstract
By shrinking the available menu of loan contracts, asymmetric information can result in two types of nonprice
rationing in credit markets. The first is conventional quantity rationing. The second is ‘risk rationing.’
Risk rationed agents are able to borrow, but only under relatively high collateral contracts that offer them
lower expected well-being than a safe, reservation rental activity. Like quantity rationed agents, credit
markets do not perform well for the risk rationed. While the incidence of conventional quantity rationing
is straightforward (low wealth agents who cannot meet minimum endogenous collateral requirements are
quantity rationed), the incidence of risk rationing is less straightforward. Increases in financial wealth, holding
productive wealth constant, counter intuitively result in the poor becoming entrepreneurs and the wealthy
becoming workers. While this counterintuitive puzzle has been found in the literature on wealth effects in
principal-agent models, we show that a more intuitive pattern of risk rationing results if we consider increases
in productive wealth. Empirical evidence drawn from four country studies corroborates the implications of
the analysis, showing that agents with low levels of productive wealth are risk rationed, and that their input
and output levels mimic those of low productivity quantity rationed firms.