Wealth, Endogenous Collateral Quality, and Financial Crises
101 Pages Posted: 19 Dec 2018 Last revised: 11 Jun 2021
Date Written: May 17, 2021
Abstract
Markets with wealthier lenders experience more severe financial crises. To investigate this puzzle, we propose a model of collateralized lending in which: (1) borrowers endogenously determine collateral quality, and (2) lenders can produce costly information about collateral. When lenders are wealthier, borrowers use lower quality collateral to suppress costly information production, however, lower collateral quality in turn leads to more severe financial crises. Empirically, we find a negative relation between wealth and collateral quality, and during crises, wealth is negatively related to loan growth, investment, productivity, and output, with evidence that the effect of wealth goes through the collateral channel.
Keywords: Collateral Quality, Financial Crises, Crisis Severity, Information Acquisition, Wealth
JEL Classification: D83, E32, E44, G01
Suggested Citation: Suggested Citation