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1 Overview WORKSHEET OVERVIEW: Stiglitz Weiss 1981.xls

2 Stiglitz & Weiss (Discrete) Stiglitz & Weiss (discrete model for illustration)

3 Stiglitz & Weiss (Continuous) Stiglitz & Weiss (continuous model)

4 Model Description Formulas from Matthews & Thomson Book

5 Beta Distribution Beta Distribution

6 Formulas Beta Distribution Formulas Beta Distribution

Stiglitz & Weiss (discrete model for illustration)

inspired by Matthews & Thompson (2008), 'The Economics of Banking', 2nd edition, Wiley, p. 122, Box 8.3

W $0.20 Wealth of investor to be invested

k $1.00 Investment required for project

L $0.80 Borrowing from bank

retproj 15.0% 150 project expected rate of return (%)

R=k*(1+retproj) $1.15 Expected payoff project

r 30.0% 300 Borrowing rate

δ 10.0% 100 Safe investment rate

r-δ 20% Borrowing / investing spread

Discrete projects

Exp.payoff Exp. payoff of Exp. Borrower Cut-off:

# of projects pi borrower i E(πi) bank per loan return (%) < or > δ E(πB)

3 30% $0.838 $0.312 319.00% > $0.94

5 40% $0.734 $0.416 267.00% > $2.08

10 50% $0.630 $0.520 215.00% > $5.20

12 60% $0.526 $0.624 163.00% > $7.49

15 70% $0.422 $0.728 111.00% > $10.92

36 80% $0.318 $0.832 59.00% > $29.95

59 90% $0.214 $0.936 7.00% <10.0% $-

100 95% $0.162 $0.988 -19.00% <10.0% $-

88 99% $0.120 $1.030 -39.80% <10.0% $-

Expect profit to bank as a function of cut-off probability p Cut-off 6

Cut-off p Offset in table p (cut-off) > 80.00%

E(πB,p) $301.20 99% 8

E(πB,p) $111.80 95% 7

E(πB,p) $56.58 90% 6

E(πB,p) $26.62 80% 5

0.35

0.3

0.25

0.2

0.15

0.1

2

0.05 5%

0

Column

0 K 10 Column20

K Column

30 O 40 50 60

0.35

0.3

0.25

0.35

0.3

0.25

0.2

0.15

0.1

0.05 5%

0

-20% 0% Column

20%K Column

40% O 60% 80% 100%

Back to Overview

0 20 40 60 80 100 120

99%

30% 3 .

95%

40% 5 90%

Success probability of project

50% 10 80%

60% 12 70%

70% 15 60%

80% 36 50%

90% 59 40%

Exp.payoff Exp. payoff of

99% 88 borrower

$- i E(pi)

$0.20 bank per loan

$0.40 $0.60 $0.80 $1.00 $1.20 $1.40

Support lines

max profit line profit maximizing loan rate

0 56.58 0 5.00% 0

5.00% $57 56.58 5.00% 0.8

0.06 56.58 57.14 5.00% 0.81

Data Table

$56.58 80.00%

5% $57 0.8

6% $57 0.8

7% $57 0.8

8% $57 0.8

9% $57 0.8

10% $57 0.8

11% $57 0.8

12% $57 0.8

13% $57 0.8

14% $57 0.8

15% $57 0.8

16% $57 0.8

17% $57 0.8

18% $57 0.8

19% $57 0.8

20% $57 0.8

21% $57 0.8

22% $57 0.8

23% $57 0.8

24% $57 0.8

25% $57 0.8

26% $57 0.8

27% $57 0.8

28% $57 0.8

29% $57 0.8

30% $57 0.8

ayoff Bank

A B C D E F G

1 Stiglitz & Weiss (continuous model)

2 Inspired by Matthews & Thompson (2008), 'The Economics of Banking', 2nd edition, Wiley, p. 122, Box 8.3

3 W $0.20 Wealth of investor to be invested

4 k $1.00 Investment required for project

5 L $0.80 Borrowing from bank

6 retproj 15.0% 150 project expected rate of return (%)

7 R=k*(1+retproj) $1.15 Expected payoff project

8 r 19.0% 190 Borrowing rate

9 δ 10.0% 100 Safe investment rate

10 r-δ 9% Borrowing / investing spread

11

12 Cut-off probability as function of loan rate r - above this p borrower will invest W at safe rate

13 p(r) 97.69% Cut-off p as function of loan rate r

14

15

16

17 Probability density function f(pi) of pi

18 Beta distributed (standard) with

19 alpha 11.6900 1169

20 beta 3.2700 327

21 Density f(pi) 0.2409 PDF at cut-off p 1 pi * f(pi) (Alpha Cut-off p as

22 = 11.7; Beta = function of loan

0.9

23 Numerical integration of pi * f(pi) from 0 to cut-off p 3.3) rate r

0.8

24

25 n 10 Intervals for numerical integration 0.7

26 Lower bound 0 0.6

27 Upper bound (p) 97.69% Cut-off p

0.5

28 p * f(p) #VALUE!

29 E(πb,p(r)) 0.4

#VALUE! Expected profit bank @ p

30 E(πb,1) #VALUE! Profit w/o cut-off 0.3

31 E(πi,p) 0.22 Expected profit borrower @ p 0.2

32 0.1

33 0

34 0% 10% 20% 30% 40% 50% 6

35

36

6.0%S

Column Column S Profit 35.0% Colum P

37 nS m

maximizing

38 iz

loan rate 30.0%

39 5.0% lo

40 ra

41 25.0%

42 4.0%

43 20.0%

44 3.0%

45 Loan rate ®

15.0%

46

47 2.0%

48 10.0%

49

1.0%

50 5.0%

51

52 0.0% 0.0%

$0.5 $0.6 $0.7 $0.8 $0.9 $1.0 80% 9

Bank Expected Profit Cut-off pro

2.0%

10.0%

1.0%

5.0%

A 0.0%B C D E F G 0.0%

53 $0.5 $0.6 $0.7 $0.8 $0.9 $1.0 80% 9

54

Bank Expected Profit Cut-off pro

55

H I J K L M N O P

1 Back to Overview

dition, Wiley, p. 2122, Box 8.3

3

4

5

6

7

8

9

10 Data Tables for Charts

11

nvest W at safe 12rate δ Beta PDF f(pi) (Alpha = 11.7; Beta = 3.3)

13 pi * f(pi) (Alpha = 11.7; Beta = 3.3)

14

15 Support line cut-off

16 97.69% 0

17 97.69% #VALUE!

18

19 0.9769 #VALUE!

20 0 0 #VALUE!

21 Cut-off p as

pi * f(pi) (Alpha 0.03 0.03 #VALUE!

= 11.7; Beta 22 = function of loan 0.05 0.05 #VALUE!

3.3) 23 rate r 0.2 0.2 #VALUE!

24 0.4 0.4 #VALUE!

25 0.45 0.45 #VALUE!

26 0.5 0.5 #VALUE!

27 0.55 0.55 #VALUE!

28 0.6 0.6 #VALUE!

29 0.65 0.65 #VALUE!

30 0.7 0.7 #VALUE!

31 0.75 0.75 #VALUE!

32 0.8 0.8 #VALUE!

33 0.85 0.85 #VALUE!

10% 20% 34

30% 40% 50% 60% 70% 80% 90% 100% 0.88 0.88 #VALUE!

35 0.9 0.9 #VALUE!

36 0.93 0.93 #VALUE!

35.0% Colum Profit

37 nS maxim 0.95 0.95 #VALUE!

38 izing 0.98 0.98 #VALUE!

30.0%

39 loan 0.98 0.98 #VALUE!

40 rate 0.99 0.99 #VALUE!

25.0%

41 1 1 #VALUE!

42 1 1 #VALUE!

43

20.0%

44

45

15.0%

46

47

10.0%

48

49

505.0%

51

520.0%

80% 90% 100%

Cut-off probability

10.0%

5.0%

0.0% H I J K L M N O P

53 80% 90% 100%

54

55 Cut-off probability

Q R S T U V W X

1

2

3

4

5

6

7

8

9

10

11

(Alpha = 11.7; 12

Beta = 3.3)

= 11.7; Beta =133.3) max profit line Profit maximizing loan rate

14 0.00% #VALUE! 0 #VALUE! 0

15 #VALUE! #VALUE! 97.69% #VALUE! #VALUE!

16 #VALUE! #VALUE! 0.99 #VALUE! #VALUE!

17

18

19 97.69% #VALUE! #VALUE!

20 5% 97.69% #VALUE! #VALUE!

21 6% 97.69% #VALUE! #VALUE!

22 7% 97.69% #VALUE! #VALUE!

23 8% 97.69% #VALUE! #VALUE!

24 9% 97.69% #VALUE! #VALUE!

25 10% 97.69% #VALUE! #VALUE!

26 11% 97.69% #VALUE! #VALUE!

27 12% 97.69% #VALUE! #VALUE!

28 13% 97.69% #VALUE! #VALUE!

29 14% 97.69% #VALUE! #VALUE!

30 15% 97.69% #VALUE! #VALUE!

31 16% 97.69% #VALUE! #VALUE!

32 17% 97.69% #VALUE! #VALUE!

33 18% 97.69% #VALUE! #VALUE!

34 19% 97.69% #VALUE! #VALUE!

35 20% 97.69% #VALUE! #VALUE!

36 21% 97.69% #VALUE! #VALUE!

37 22% 97.69% #VALUE! #VALUE!

38 23% 97.69% #VALUE! #VALUE!

39 24% 97.69% #VALUE! #VALUE!

40 25% 97.69% #VALUE! #VALUE!

41 26% 97.69% #VALUE! #VALUE!

42 27% 97.69% #VALUE! #VALUE!

43 28% 97.69% #VALUE! #VALUE!

44 29% 97.69% #VALUE! #VALUE!

45 30% 97.69% #VALUE! #VALUE!

46

47

48

49

50

51

52

Q R S T U V W X

53

54

55

Formulas from Matthews & Thomson Book

Inspired by Matthews & Thompson (2008), 'The Economics of Banking', 2nd edition, Wiley, p. 122, Box 8.3

Stiglitz, J. E., & Weiss, A. (1981). Credit Rationing in Markets with Imperfect Information. The American Economic Review,

http://www.jstor.org/stable/1802787

Back to Overview

y, p. 122, Box 8.3

The American Economic Review, 71(3), 393-410.

Beta Distribution

X 0.6000

alpha 11.6900 1169

beta 3.2800 328

A 1

B 5

PDF (Standard: A=0, B=1)) 0.0000 #VALUE!

PDF 0.0000 #VALUE!

Cumulative (Standard: A=0, B=1)) 0 #VALUE!

Cumulative 0 #VALUE!

0 1

0 0.9

0 0.8

0 0.7

0 Alpha = 11.7;

Beta = 3.3 0.6

0 0.5

0 0.4

0 0.3 Alpha = 11.7;

0 0.2 Beta = 3.3

0 0.1

0 0

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 0 0.1 0.2 0.3 0.4 0.5

0 0

0 Alpha = 11.7; Alpha = 11.7;

Beta = 3.3 0 Beta = 3.3

0 ;A=1 ;B=5 ;A=1 ;B=5

0

0

0

0

0

0

0 0

0 0

0 0

0 0

0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5 0.5 1 1.5 2 2.5 3

Back to Overview

1 0

0.9 0.03

0.8 0.05

0.7 0.1

0.15

0.6

0.2

0.5

0.25

0.4 0.3

0.3 Alpha = 11.7; 0.35

0.2 Beta = 3.3

0.4

0.1 0.45

0 0.5

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 0.55

0.6

0.65

0.7

Alpha = 11.7; Beta = 3.3 ;A=1 ;B=5 0.75

0 0.8

Alpha = 11.7; 0.85

0 Beta = 3.3 0.9

0 ;A=1 ;B=5 0.95

0 0.98

1

0

0

0

0

0

0.5 1 1.5 2 2.5 3 3.5 4 4.5 5 5.5

Alpha = 11.7; Beta = 3.3 Alpha = 11.7; Beta = 3.3 ;A=1 ;B=5

0 0.0000 0 0.0000

0 0 1 0 0

0 0 1.2 0 0

0 0 1.4 0 0

0 0 1.6 0 0

0 0 1.8 0 0

0 0 2 0 0

0 0 2.2 0 0

0 0 2.4 0 0

0 0 2.6 0 0

0 0 2.8 0 0

0 0 3 0 0

0 0 3.2 0 0

0 0 3.4 0 0

0 0 3.6 0 0

0 0 3.8 0 0

0 0 4 0 0

0 0 4.2 0 0

0 0 4.4 0 0

0 0 4.6 0 0

0 0 4.8 0 0

0 0 5 0 0

0 0

0 0

Formulas Beta Distribution

The probability density function of the standard beta distribution (A=0, B=1)

The probability density function of the beta distribution

The general formula for the probability density function of the beta distribution is

where p and q are the shape parameters, a and b are the lower and upper bounds, respectively, of the distribution, and B(p,q)

The case where a = 0 and b = 1 is called the standard beta distribution. The equation for the standard beta distribution is

Back to Overview

e distribution, and B(p,q) is the beta function. The beta function has the formula

rd beta distribution is

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