there are costs associated with seizing the pledged asset. One source of these costs is the money and time spent enforcing the contract. Another reason for capital market imperfections associated with limited commitment is the ability of the borrower to renegotiate the terms of the contract ex post. Even though the contract is signed as a secured loan, because of the enforcement costs, the lender never gets the full payment in case of default. Ex post, the borrower always has the option to offer more than the lender would get in case of default, but less than the full payment. That is why the incentive compatibility is needed to ensure binding contracts, in imperfect capital markets. Relation with incomplete markets The other feature of the capital market leading to imperfections is that credit is not a homogeneous good. It is a different good in different states of world in different times and even given different people. In an idealized "perfect" market, economists expect the market to "achieve every desired exchange for homogeneous goods when there is only one price". Based on that, to have a perfect capital market, every agent may exchange funds at the existing single interest rate for each type of fund. However, in reality we do not have that many different types of credit/funds for each different states of world to have complete market. Consequences of imperfections in capital markets With perfect information as the interest rate increases, expected return to the lender increases as the lender charges the borrower more for the lending service. However, with imperfect information there is also an indirect opposite effect. As the interest rate rises, the possibility of selecting riskier borrowers increases as the cost increases less for them as they may not pay it back. Hence, as the interest rate goes up, the return to the lender decreases only considering the adverse selection effect. Considering these two opposite effects, the lender may determine the interest rate to maximize the rate of return so it does not necessarily clear the market. In that situation, some individuals can not obtain any credit at the existing market interest rate although they are willingly to pay the market value. Hence, we see credit rationing as a result of imperfection in capital markets. Credit rationing does not just caused from asymmetric information but also from limited enforcement in case of default. There are also costs