Collateral and Asymmetric Information in Lending Markets

56 Pages Posted: 20 Aug 2019 Last revised: 15 Mar 2021

See all articles by Vasso Ioannidou

Vasso Ioannidou

Bayes Business School (formerly Cass); Centre for Economic Policy Research (CEPR)

Nicola Pavanini

Tilburg University; Tilburg University - Tilburg University School of Economics and Management; CEPR IO Programme

Yushi Peng

Tilburg University

Date Written: August 2019

Abstract

We study the benefits and costs of collateral requirements in bank lending markets with asymmetric information. We estimate a structural model of firms' credit demand for secured and unsecured loans, banks' contract offering and pricing, and firm default using credit registry data in a setting where asymmetric information problems are pervasive. We provide evidence that collateral mitigates adverse selection and moral hazard. With counterfactual experiments, we quantify how an adverse shock to collateral values propagates to credit supply, credit allocation, interest rates, default, bank profits, and document the relative importance of banks' pricing and rationing in response to this shock.

JEL Classification: D82, G21, L13

Suggested Citation

Ioannidou, Vasso and Pavanini, Nicola and Peng, Yushi, Collateral and Asymmetric Information in Lending Markets (August 2019). CEPR Discussion Paper No. DP13905, Available at SSRN: https://ssrn.com/abstract=3439458

Vasso Ioannidou (Contact Author)

Bayes Business School (formerly Cass) ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Nicola Pavanini

Tilburg University ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

HOME PAGE: http://https://sites.google.com/site/nicolapavanini/

Tilburg University - Tilburg University School of Economics and Management ( email )

PO Box 90153
Tilburg, 5000 LE Ti
Netherlands

CEPR IO Programme ( email )

London
United Kingdom

Yushi Peng

Tilburg University ( email )

P.O. Box 90153
Tilburg, Noord-Brabant 5000 LE
Netherlands

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