DIFFERENTIAL EFFECTS OF TIGHT MONEY: AN ECONOMIC RATIONALE

Abstract

CONTROVERSY EXISTS in economic literature on the differential effects of tight monetary situations among different sized firms. Silber and Polakoff [49] and Galbraith [16] argue that restrictive monetary policy is discriminatory against small firms while Bach and Huizenga [3] and a Federal Reserve study [12] find no evidence of such alleged discrimination.' One reason for these disparate results, and for the widespread controversy about this entire matter, is that different concepts of discrimination may be employed by different investigators. There is a widespread tendency to confuse the economic concept of discrimination, in any of several forms, with the political idea of equal treatment. Further, even within the concept of economic discrimination, there are two distinct forms: price discrimination of the familiar Joan Robinson [45] type and discrimination through non-price rationing. For bankers to profit from price discrimination in providing to large and small borrowers, there must be, among other things, differences among the borrowers with respect to their credit-demand elasticities. Bach and Huizenga hardly discuss the demand aspect, while Silber and Polakoff find refuge in the non-availability of data to estimate demand elasticities. Silber and Polakoff's specification of the supply function is also incomplete and necessitated their invoking the behavioral hypothesis such as desire to discriminate . . . on the part of bankers.2 While they do recognize that the problem arising from restrictive monetary policy should be dealt with under the rubric of credit worthiness, in their empirical analysis they revert back to discussions of the problem of discrimination by firm size. Also they fail to identify or include in their analysis the relevant determinants of loan safety. The purpose of this paper is to identify these determinants of loan safety, their relations inter se and with the cost of the loan, and to analyze the relationships of these determinants to firm size in both a static and a dynamic framework. In the process, an economic rationale is provided for Silber and