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# Worksheet Name
1 Overview
2 Stiglitz & Weiss (Discrete)
3 Stiglitz & Weiss (Continuous)
4 Model Description
5 Beta Distribution
6 Formulas Beta Distribution
Title
WORKSHEET OVERVIEW: Stiglitz Weiss 1981.xls
Stiglitz & Weiss (discrete model for illustration)
Stiglitz & Weiss (continuous model)
Formulas from Matthews & Thomson Book
Beta Distribution
Formulas Beta Distribution
khess WMS 11/02/2021 25891331.xls Overview Page 1
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
d 10.0% 100 Safe investment rate
r-d 20% Borrowing / investing spread

Discrete projects
Exp.payoff Exp. payoff of Exp. Borrower Cut-off:
# of projects pi borrower i E(pi) bank per loan return (%) < or > d E(pB)
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 $ 0.929 7.00% <10.0% $ 54.80
100 95% $ 0.162 $ 0.927 -19.00% <10.0% $ 92.72
88 99% $ 0.120 $ 0.927 -39.80% <10.0% $ 81.54

Total E(pB): $ 56.58

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(pB,p) $ 301.20 99% 8
E(pB,p) $ 111.80 95% 7
E(pB,p) $ 56.58 90% 6
E(pB,p) $ 26.62 80% 5

Profit maximizing loan rate for bank

0.35

0.3

0.25

0.2 2
17%
0.15

0.1

0.05

0
0 50 100 150 200 250 300
Expected bank profit Max Exp. Profit Bank Loan rate

Cuf-off probabilities (p) as a function of loan rate

0.35

0.3

0.25

0.2
17%
0.15

0.1

0.05

0
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Cut-off probabilities Column O
 Back to Overview

.
S u c c e s s p r o b a b ility o f p r o je c t
Histogram of projects
0 20 40 60 80 100 120

30% 3

40% 5
Payoff Borrower vs. Payoff Bank
50% 10 $- $0.20 $0.40 $0.60 $0.80 $1.00 $1.20 $1.40

99%
60% 12
95%
70% 15 90%
80%
80% 36 70%
60%
90% 59 50%
40%
95% 100
30%
99% 88 Exp.payoff borrower i E(pi) Exp. payoff of bank per loan

Support lines
max profit line profit maximizing loan rate
0 271.0843 0 0.17 0
0.17 $ 271 271.0843 0.17 1
0.204 271.0843 273.7952 0.17 1.01

Data Table
$ 56.58 80.00%
5% $ 243 1
6% $ 246 1
7% $ 248 1
8% $ 250 1
9% $ 253 1
10% $ 255 1
11% $ 257 1
12% $ 259 1
13% $ 262 1
14% $ 264 1
15% $ 266 1
16% $ 269 1
17% $ 271 1
18% $ 191 0.95
19% $ 193 0.95
20% $ 194 0.95
21% $ 196 0.95
22% $ 198 0.95
23% $ 106 0.9
24% $ 107 0.9
25% $ 108 0.9
26% $ 108 0.9
27% $ 109 0.9
28% $ 110 0.9
29% $ 111 0.9
30% $ 57 0.8
off Bank
$0.80 $1.00 $1.20 $1.40

. payoff of bank per loan

 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 d 10.0% 100 Safe investment rate
10 r-d 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
22 pi * f(pi) (Alpha = 11
23 Numerical integration of pi * f(pi) from 0 to cut-off p Cut-off p as function
24 1
25 n 10 Intervals for numerical integration 0.9
26 Lower bound 0 0.8
27 Upper bound (p) 97.69% Cut-off p 0.7
28 p * f(p) #VALUE! 0.6
29 E(pb,p(r)) #VALUE! Expected profit bank @ p 0.5
E(pb,1) 0.4
30 #VALUE! Profit w/o cut-off
0.3
31 E(pi,p) 0.22 Expected profit borrower @ p 0.2
32 0.1
33 0
34 0% 10% 20% 30% 40% 50% 6
35
36
37 Loan rate ® Cut-off p
Expected bank profit
38 Profit m
6.0% Expected bank profit w/o cut-off 35.0%
39
Profit maximizing loan rate
40 30.0%
5.0%
41
42 25.0%
4.0%
43
44 20.0%
45 3.0%
46 15.0%
47 2.0%
48 10.0%
49 1.0%
50 5.0%
51 0.0%
52 $0.0 $0.1 $0.2 $0.3 $0.4 $0.5 $0.6 $0.7 $0.8 $0.9 $1.0 0.0%
Bank Expected Profit 80%Cut-off
85%prob9
 15.0%
2.0%
10.0%
1.0%
5.0%
0.0%
A
$0.0 $0.1 B
$0.2 $0.3 $0.4C $0.5 $0.6D $0.7 E$0.8 F
$0.9 $1.0 G 0.0%
Bank Expected Profit 80%Cut-off
85%prob9
53
54
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
vest W at safe12rate d 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 0.976891 #VALUE!
18
19 0.9769 #VALUE!
20 1E-13 1E-13 #VALUE!
21 0.025 0.025 #VALUE!
22 pi * f(pi) (Alpha = 11.7; Beta = 3.3) 0.05 0.05 #VALUE!
23 Cut-off p as function of loan 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% 3430% 40% 50% 60% 70% 80% 90% 100% 0.875 0.875 #VALUE!
35 0.9 0.9 #VALUE!
36 0.925 0.925 #VALUE!
37 Cut-off probabilities 0.95 0.95 #VALUE!
38 Profit maximizing loan rate 0.975 0.975 #VALUE!
35.0%
39 0.98 0.98 #VALUE!
4030.0% 0.99 0.99 #VALUE!
41 0.995 0.995 #VALUE!
4225.0% 1 1 #VALUE!
43
4420.0%
45
4615.0%
47
4810.0%
49
50 5.0%
51
52 0.0%
80%Cut-off
85%probability
90% 95% 100%
 15.0%

10.0%

5.0%

0.0% H I J K L M N O P
80%Cut-off
85%probability
90% 95% 100%
53
54
55
 Q R S T U V W X
1
2
3
4
5
6
7
8
9
10
11
(Alpha = 11.7;12Beta = 3.3)
= 11.7; Beta =133.3) max profit line Profit maximizing loan rate
14 0.00% #VALUE! 0 #VALUE! 0
15 #VALUE! #VALUE! 100.00% #VALUE! #VALUE!
16 #VALUE! #VALUE! 1.01 #VALUE! #VALUE!
17
18
19 97.69% #VALUE! #VALUE!
20 5% 100.00% #VALUE! #VALUE!
21 6% 100.00% #VALUE! #VALUE!
22 7% 100.00% #VALUE! #VALUE!
23 8% 100.00% #VALUE! #VALUE!
24 9% 100.00% #VALUE! #VALUE!
25 10% 100.00% #VALUE! #VALUE!
26 11% 100.00% #VALUE! #VALUE!
27 12% 100.00% #VALUE! #VALUE!
28 13% 100.00% #VALUE! #VALUE!
29 14% 100.00% #VALUE! #VALUE!
30 15% 100.00% #VALUE! #VALUE!
31 16% 100.00% #VALUE! #VALUE!
32 17% 99.36% #VALUE! #VALUE!
33 18% 98.52% #VALUE! #VALUE!
34 19% 97.69% #VALUE! #VALUE!
35 20% 96.88% #VALUE! #VALUE!
36 21% 96.07% #VALUE! #VALUE!
37 22% 95.29% #VALUE! #VALUE!
38 23% 94.51% #VALUE! #VALUE!
39 24% 93.75% #VALUE! #VALUE!
40 25% 93.00% #VALUE! #VALUE!
41 26% 92.26% #VALUE! #VALUE!
42 27% 91.54% #VALUE! #VALUE!
43 28% 90.82% #VALUE! #VALUE!
44 29% 90.12% #VALUE! #VALUE!
45 30% 89.42% #VALUE! #VALUE!
46
47
48
49
50
51
52
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
, 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)) 0.8567 #VALUE!
PDF #NUM! #VALUE!
Cumulative (Standard: A=0, B=1)) 0.057530827 #VALUE!
Cumulative 0 #VALUE!

Standard beta distribution (A=0, B=1)

Alpha = 11.7; Beta = 3.3 Alpha =

4.5 1
4 0.9
3.5 0.8
Alpha = 11.7; Beta = 3.3 0.7
3
2.5 0.6
2 0.5
0.4
1.5 Alpha =
0.3
1 0.2
0.5 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

General beta distribution

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

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

1.2 1.2 3.3 ;A=1 ;B=5
1 1
0.8 0.8
0.6 0.6
0.4 0.4
0.2 0.2
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

Alpha = 11.7; Beta = 3.3

Alpha = 11.7; Beta = 3.3 1E-13

0.025
1 0.05
0.9 0.1
0.8 0.15
0.7
0.2
0.6
0.25
0.5
0.3
0.4
Alpha = 11.7; Beta = 3.3 0.35
0.3
0.2 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
0.75
Alpha = 11.7; Beta = 3.3 ;A=1 ;B=5 0.8
Alpha = 11.7; Beta = 0.85
1.2 3.3 ;A=1 ;B=5 0.9
0.95
1
0.975
0.8 1

0.6

0.4

0.2

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

0.0575 0.8567 0 #NUM!

1E-150 2E-136 1 1E-157 2E-143
2E-17 1E-14 1.2 8E-14 4E-12
8E-14 2E-11 1.4 2E-10 7E-09
2E-10 3E-08 1.6 2E-08 4E-07
2E-08 2E-06 1.8 6E-07 8E-06
6E-07 3E-05 2 7E-06 8E-05
7E-06 0.0003 2.2 5E-05 0.0005
5E-05 0.0019 2.4 0.0003 0.002
0.0003 0.0082 2.6 0.0011 0.0071
0.0011 0.0283 2.8 0.0036 0.0204
0.0036 0.0818 3 0.0104 0.0507
0.0104 0.2029 3.2 0.0259 0.1105
0.0259 0.4421 3.4 0.0575 0.2142
0.0575 0.8567 3.6 0.1152 0.3717
0.1152 1.4867 3.8 0.2095 0.5776
0.2095 2.3102 4 0.3472 0.7968
0.3472 3.1873 4.2 0.5242 0.9551
0.5242 3.8203 4.4 0.7182 0.9476
0.7182 3.7905 4.6 0.8865 0.6926
0.8865 2.7706 4.8 0.9823 0.2542
0.9823 1.0168 5 1 4E-29
0.9978 0.2764
1 0
Formulas Beta Distribution

Formulas from http://wapedia.mobi/en/Beta_distribution retrieved 12/11/2008

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

Formulas from http://www.itl.nist.gov/div898/handbook/eda/section3/eda366h.htm

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

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

rd beta distribution is