The Option to Wait to Invest and Equilibrium Credit Rationing

Abstract

Stiglitz and Weiss (1981) show that firms considering risky projects have higher reservation interest rates and hence it is optimal for a bank to reduce loan supply. In this note we show that when the risk involved in an investment will be resolved in the future, investors with riskier projects have a greater return from waiting, More risky projects have lower reservation interest rates and hence there is no motive for banks to ration credit demand.