ABSTRACT
This chapter extends the partial equilibrium framework to allow for uncertainty in the supply of household deposits to the intermediary. It compares the difference in the firm's expected profits under the two rationing regimes to the difference in the intermediary's expected return under the two regimes. Analysis begins by calculating a "gain function" for the firm that gives the difference between the firm's profits under size rationing and number rationing. The chapter presents a special case of a Cobb-Douglas production technology. It explores the properties of the intermediary's gain function, which gives the difference in the intermediary's expected returns under the two rationing regimes. The chapter also explores the conditions under which loan-size rationing may be preferred to loan-number rationing. It shows that for Cobb-Douglas production technologies with sufficiently small output elasticities, the difference function is everywhere positive and loan size rationing is preferred to number rationing on the entire range of tight credit.
