Abstract

Information Costs, Adjustment Costs and the Theory of the Credit Market

Traditional price theory is unable to give a satisfactory explanation of the different characteristics of the security market and the credit market. Whereas on the security market allocation is controlled exclusively by the market interest rate, the market for bank credits is characterized by inflexible interest rates and price-indepedent rationing. This article discussed briefly the contributions made to the rationing debate by Samuelson, Scott, Hodgman, Chase, Miller, Jaffee et al. With the help of a price theory which explicitly allows for information and adjustment costs, various phenomena of the credit market are explained in the main part. The conception of the explanation is founded in particular on the ideas of Alchian. For, in contrast to the acquisition of securities, the granting of a loan is nothing more, economically speaking, than the purchase of a claım of very uncertain quality. The reduction of the uncertainty and the reactions in the case of exogenous disturbances result in positive information and adjustment costs. It is shown that the substantial differences between the credit and security markets are attributable to the difference in the significance of these cost components on the two markets. The allocation criterion for lender and borrower is not the market interest rate, but the interest rate including the information and adjustment costs. To reduce the two cost components as far as possible, the banks have developed various strategies. One possibility, which is nothing short of a definition of the credit market, is the policy of interest rate stabilization. Various elements of bank management theory which have always called forth response from practical bankers can thus be integrated into the theory of the credit market. A narrowing of the gap between theory and practice in banking seems possible.