Collateral and Asymmetric Information in Lending Markets

64 Pages Posted: 20 Aug 2019

See all articles by Vasso Ioannidou

Vasso Ioannidou

Lancaster University - Management School; Centre for Economic Policy Research (CEPR)

Nicola Pavanini

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

Yushi Peng

University of Zurich

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 detailed credit registry data in a setting where asymmetric information problems in credit markets 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, and bank profits and how the severity of adverse selection influences this propagation.

Keywords: asymmetric information, Collateral, credit markets, structural estimation

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)

Lancaster University - Management School ( email )

Bailrigg
Lancaster, LA1 4YX
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

University of Zurich ( email )

Rämistrasse 71
Zürich, CH-8006
Switzerland

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