[{"data":1,"prerenderedAt":-1},["ShallowReactive",2],{"detail-sidebar-cat-0-en-105":3,"doc-seo-322783-105":59,"doc-detail-322783-en":131},{"code":4,"msg":5,"data":6},0,"success",[7,13,18,23,28,33,38,43,48,51,55],{"id":8,"doc_module":4,"doc_module_name":9,"category_name":10,"show_sort_weight":11,"slug":12},1,"Document","Story & Novel",90,"story-novel",{"id":14,"doc_module":4,"doc_module_name":9,"category_name":15,"show_sort_weight":16,"slug":17},2,"Literature",80,"literature",{"id":19,"doc_module":4,"doc_module_name":9,"category_name":20,"show_sort_weight":21,"slug":22},4,"Exam",70,"exam",{"id":24,"doc_module":4,"doc_module_name":9,"category_name":25,"show_sort_weight":26,"slug":27},5,"Comic",60,"comic",{"id":29,"doc_module":4,"doc_module_name":9,"category_name":30,"show_sort_weight":31,"slug":32},6,"Technology",50,"technology",{"id":34,"doc_module":4,"doc_module_name":9,"category_name":35,"show_sort_weight":36,"slug":37},7,"Healthcare",40,"healthcare",{"id":39,"doc_module":4,"doc_module_name":9,"category_name":40,"show_sort_weight":41,"slug":42},8,"Research & Report",30,"research-report",{"id":44,"doc_module":4,"doc_module_name":9,"category_name":45,"show_sort_weight":46,"slug":47},9,"Religion & Spirituality",20,"religion-spirituality",{"id":46,"doc_module":4,"doc_module_name":9,"category_name":49,"show_sort_weight":46,"slug":50},"World Cup","world-cup",{"id":52,"doc_module":4,"doc_module_name":9,"category_name":53,"show_sort_weight":52,"slug":54},10,"Lifestyle","lifestyle",{"id":56,"doc_module":4,"doc_module_name":9,"category_name":57,"show_sort_weight":24,"slug":58},19,"General","general",{"code":4,"msg":60,"data":61},"ok",{"site_id":62,"language":63,"slug":64,"title":65,"keywords":66,"description":67,"schema_data":68,"social_meta":124,"head_meta":126,"extra_data":128,"updated_unix":130},105,"en","the-role-of-relationships-in-small-business-lending","The Role of Relationships in Small-Business Lending","","Relationships shape how credit is allocated in small-business lending when information is imperfect. The analysis reviews how adverse selection and moral hazard can prevent prices from clearing credit markets, leading to credit rationing where borrowers cannot obtain loans at any interest rate. Focusing on small-firm opacity, the commentary explains how close lending relationships help lenders identify credit-worthy borrowers, reduce information-related problems, and improve allocation. It also contrasts these private solutions with policy guarantees.",{"@graph":69,"@context":123},[70,84,106],{"@type":71,"itemListElement":72},"BreadcrumbList",[73,77,79,82],{"item":74,"name":75,"@type":76,"position":8},"https://docshare.wps.com","Home","ListItem",{"item":78,"name":9,"@type":76,"position":14},"https://docshare.wps.com/document/",{"item":80,"name":40,"@type":76,"position":81},"https://docshare.wps.com/document/research-report/",3,{"item":83,"name":65,"@type":76,"position":19},"https://docshare.wps.com/document/the-role-of-relationships-in-small-business-lending/322783/",{"url":83,"name":65,"@type":85,"image":86,"author":91,"headline":65,"publisher":94,"fileFormat":97,"inLanguage":63,"description":67,"dateModified":98,"datePublished":99,"encodingFormat":97,"isAccessibleForFree":100,"interactionStatistic":101},"DigitalDocument",{"url":87,"@type":88,"width":89,"height":90},"https://docshare.wps.com/thumbnails/the-role-of-relationships-in-small-business-lending/322783.png","ImageObject",300,407,{"name":92,"@type":93},"Riley","Person",{"url":74,"name":95,"@type":96},"DocShare","Organization","application/pdf","2026-10-29","2026-09-21",true,{"@type":102,"interactionType":103,"userInteractionCount":105},"InteractionCounter",{"@type":104},"ViewAction",16,{"@type":107,"mainEntity":108},"FAQPage",[109,115,119],{"name":110,"@type":111,"acceptedAnswer":112},"Why do imperfect information problems lead to credit rationing in small-business lending?","Question",{"text":113,"@type":114},"Imperfect information enables adverse selection and moral hazard, so interest rates can change the riskiness of the applicant pool and borrower behavior. This prevents markets from allocating credit using price alone, resulting in credit rationing.","Answer",{"name":116,"@type":111,"acceptedAnswer":117},"What is adverse selection in the context of bank lending?",{"text":118,"@type":114},"Adverse selection arises when a bank cannot distinguish between high- and low-risk borrowers. A posted rate based on average risk attracts more low-credit-worth applications, making the posted rate too low and harming profitability.",{"name":120,"@type":111,"acceptedAnswer":121},"How do lending relationships help reduce credit rationing?",{"text":122,"@type":114},"Relationships between banks and small businesses are closer than between banks and large firms. This closeness helps lenders identify credit-worthy borrowers, reduces information-lending problems, and improves credit allocation.","https://schema.org",{"og:url":83,"og:type":125,"og:title":65,"og:site_name":95,"og:description":67},"article",{"robots":127,"canonical":83},"index,follow",{"doc_id":129,"site_id":62},322783,1790376092,{"code":4,"msg":5,"data":132},{"doc_id":129,"user_id":133,"nickname":92,"user_avatar":134,"doc_module":4,"category_id":39,"category_name":40,"doc_title":65,"doc_description":67,"doc_content":135,"file_id":136,"file_url":137,"file_type":138,"file_size":139,"view_count":105,"is_deleted":4,"is_public":8,"is_downloadable":8,"audit_status":8,"page_count":24,"language":140,"language_code":63,"site_id":62,"html_lang":63,"table_of_contents":141,"faqs":142,"seo_title":143,"seo_description":67,"update_tm":144,"read_time":145,"preview_page_count":4},1374391975076,"https://ap-avatar.wpscdn.com/avatar/14000253ca4ec9f6853?x-image-process=image/resize,m_fixed,w_180,h_180&k=1783305029341752051","# The Role of Relationships inSmall-Business Lending\n\nby Ben R.Craig,William E.Jackson IIl,and James B.Thomson  \nEconomists have long recognized theimportance of credit markets in theeconomy.Bank lending in particular isgenerally thought to be an importantdriver of economic growth.Moreover,credit-market stability has long beenseen to be associated with economicstability.For instance,in the mid-nineteenth-century classic,LombardSitreet,Walter Bagehot describes amechanism through which disruptionsin credit markets can be transmitted toreal economic activity.More than acentury later,economists point to therole played by credit markets in thetransmission of monetary policy andcredit-market disruptions as a factorcontributing to economic fluctuations,including the Great Depression.  \nStudies oferedit markets and the rolethey play in economic growth,develop-ment,andfluctuations often focus on thebanking system and bank lending.Banks are viewed to be particularlyimportant because,through their lendingactivities,they may provide importantinformation on production and evalua-tion services;that is,banks make loansto businesses whose balance sheets lacksufficient transparency to allow directaccess to financial markets.As bankersare far from omnipotent,lending toopaque borrowers requires banks toresolve the information-related prob-lems of adverse selection and moral haz-ard in credit markets.The first effect,adverse selection,affects the ability ofmarkets to allocate credit by the lendingrate(price)because it removes thelower-risk borrowers from the set ofpotential borrowers.The second conse-quence,moral hazard,reduces the abil-ity ofprices to clear the lending marketsby influencing the actions of borrowers  \nThis Economie Commentary reviews theanalysis of financial market equilibriumin the presence of imperfect information.We review work ofJoseph Stiglitz andAndrew Weiss on how the problemsposed by imperfect information—inparticular adverse selection and moralhazard—can result in credit rationing(the inability to obtain a loan at anyprice).Our interest is in the market forsmall-business loans,as the opaquenessof small firmsgives rise to concems ofcredit rationing.In a previous EconomicCommentary(September 2004),weexamined whether a particular govem-ment intervention,Small BusinessAdministration loan guarantees,couldimprove the allocation of credit to smallbusinesses.Absent from that discussionwas the role that private solutions,suchas lending relationships,play in reducingcredit rationing by lenders.  \nUnderstanding the role that lending rela-tionships play in the allocation of creditis central to any assessment of small-business-credit markets.Mitch Petersonsuggests that small-business lending isdifferent from large-business lendingon three dimensions:financing costs,information costs,and the importance oflending relationships.Small businessespay a higher fixed cost per unit of creditthan larger businesses.Asymmetricinformation problems associated withsmall firms are more severe than withlarger firms.Relationships betweenbanks(typically small ones)and smallbusinesses are much closer than thosebetween large companies and banks,and as we explain below,are morevaluable to both small businesses andto the banks.Hence,financing costs aredifferent for small firms.  \nOctober 15,2005  \nIn the presence of imperfect informa-tion,both large and small banks try tofind alternative ways to identify credit-worthy borrowers.Lending relation-ships are one way to go about this.Relationships between banks andsmall businesses tend to be muchcloser than those between banks andlarge businesses.This Commentaryexplains why lending relationships arevaluable to both small businesses andbanks,how they reduce information-lending problems,and what othersolutions exist to helpin the reduction.  \n■ Economics ofSmall-  \nBusiness-Loan Markets  \nMany economists,most notably JosephStiglitz and Andrew Weiss,contend thatprivate lending institutions may indeedfail to alloca","cbCainklUbwfNDU3","https://ap.wps.com/l/cbCainklUbwfNDU3","pdf",1292915,"English","# The Role of Relationships in Small-Business Lending\n## Financial Market Equilibrium and Imperfect Information\n## Credit Rationing in Small-Business Loan Markets\n## Adverse Selection and Moral Hazard\n## Lending Relationships as a Private Solution","[{\"question\":\"Why do imperfect information problems lead to credit rationing in small-business lending?\",\"answer\":\"Imperfect information enables adverse selection and moral hazard, so interest rates can change the riskiness of the applicant pool and borrower behavior. This prevents markets from allocating credit using price alone, resulting in credit rationing.\"},{\"question\":\"What is adverse selection in the context of bank lending?\",\"answer\":\"Adverse selection arises when a bank cannot distinguish between high- and low-risk borrowers. A posted rate based on average risk attracts more low-credit-worth applications, making the posted rate too low and harming profitability.\"},{\"question\":\"How do lending relationships help reduce credit rationing?\",\"answer\":\"Relationships between banks and small businesses are closer than between banks and large firms. This closeness helps lenders identify credit-worthy borrowers, reduces information-lending problems, and improves credit allocation.\"}]","The Role of Relationships in Small-Business Lending | PDF",1789963544,13]