Optimal Contract for Asset Trades: Collateralizing or Selling?

52 Pages Posted: 8 Oct 2018 Last revised: 21 Jul 2020

See all articles by Kee-Youn Kang

Kee-Youn Kang

University of Liverpool Management School

Date Written: February 16, 2018

Abstract

I study the conditions under which assets are sold or used as collateral. Secured loans can be optimal by reducing the lender's incentives to acquire costly information about the future value of collateral assets. Furthermore, when the borrower has incentives to falsify the assets' quality, the assets cannot be sold but can be used as collateral via over-collateralization, and secured loans are optimal. However, under secured debts, the borrower may default strategically. Thus, an asset sale can be optimal under some conditions. In the paper, I also provide a theoretic explanation for the negative correlations between interest rates and haircuts.

Keywords: Asymmetric Information, Costly Information Acquisition, Fraud, Collateralized Loan Contract

JEL Classification: D8, D53, E0, E44, G12

Suggested Citation

Kang, Kee-Youn, Optimal Contract for Asset Trades: Collateralizing or Selling? (February 16, 2018). Available at SSRN: https://ssrn.com/abstract=3250235 or http://dx.doi.org/10.2139/ssrn.3250235

Kee-Youn Kang (Contact Author)

University of Liverpool Management School ( email )

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