The Separating Role of Collateral Requirements in Credit Markets with Asymmetric Information

U of Valencia LINEEX Working Paper No. 23/01

33 Pages Posted: 14 Sep 2001

See all articles by C. Monica Capra

C. Monica Capra

Claremont Graduate University

Matilde O. Fernandez

University of Valencia

Irene Comeig

University of Valencia - Department of Finance

Date Written: May 2001

Abstract

In this paper we test Bester's (1985, 1987) prediction about the separating role of contracts that involve both interest rates and collateral requirements in credit markets. To test this prediction we use data from natural credit markets and controlled experiments. Using a sample of credits to small and medium size firms in Valencia, Spain, we relate two different types of contracts with the ex post risk type of the borrower and other relevant variables. We then design two incentive compatible contracts and analyze decisions under two different experimental treatments, one with moral hazard. Our empirical results confirm that borrowers of ex post lower risk choose contracts with higher collateral and lower interest rate. However, we find evidence that the existence of moral hazard could reduce separation.

Keywords: Credit Markets, Incentive Compatible Contracts, Asymmetric Information, Moral Hazard, Experiments

Suggested Citation

Capra, C. Monica and Fernandez, Matilde O. and Ramirez-Comeig, Irene, The Separating Role of Collateral Requirements in Credit Markets with Asymmetric Information (May 2001). U of Valencia LINEEX Working Paper No. 23/01, Available at SSRN: https://ssrn.com/abstract=283179 or http://dx.doi.org/10.2139/ssrn.283179

C. Monica Capra

Claremont Graduate University ( email )

170 E. Tenth Street
Claremont, CA 91711
United States

Matilde O. Fernandez

University of Valencia

E-46022 Valencia, Valencia E-46022
Spain

Irene Ramirez-Comeig (Contact Author)

University of Valencia - Department of Finance ( email )

E-46022 Valencia
Spain
96 3828369 (Phone)
96 3828370 (Fax)

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