ABSTRACT
This chapter has two objectives: to develop a model of a purely competitive market for bank loans, and to demonstrate that the type of credit rationing may occur in such a market. An equilibrium exists when no bank has an incentive to alter either the terms at which it grants loans or the number of firms to which it lends. Since firms are identical, the terms offered by each bank in equilibrium must yield the same level of expected profits for a representative customer. Also, for an equilibrium to exist no bank can have an incentive to alter either the terms at which it grants loans or the number of firms to which it lends. In equilibrium banks will charge the same loan rate and grant loans of the same size to all customers. Although different loan terms will be offered to each class of firms, expected profits per loan must be the same for all borrowers in equilibrium.
