Do Banks Ration Credit to New Enterprises? And Should Governments Intervene?

Do banks deny credit to new start-ups? The presumption that they do has motivated government intervention in several forms, including publicly backed loan guarantee schemes in the UK and elsewhere. This paper presents an overview of the modern theory and evidence of credit rationing, and concludes that the case for credit rationing is weak. Ultimately, theoretical arguments for or against credit rationing are inconclusive, so evidence is needed to decide the issue. The evidence is not supportive of the view that credit rationing is an important or widespread phenomenon. Copyright 2002 by Scottish Economic Society.

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