Some consequences of credit rationing in an endogenous growth model

An endogenous growth model is developed where all investment is financed via credit extension. There is also an adverse selection problem in loan markets, so that in equilibrium credit rationing arises endogenously. The result is that equilibrium levels of credit rationing and real growth rates are jointly determined. In this context several changes in the environment can have unusual consequences. For instance, improvements in the technology for producing capital can reduce growth, because of their adverse impacts on credit rationing. For similar reasons, various government investment subsidies can be growth-reducing. This phenomenon is often observed empirically.