Economics of Bankruptcy Exemption: Signaling Value of Collateral, Cost of Credit and Access to Credit

CRENOS Working Papers (quaderni di ricerca), Forthcoming

45 Pages Posted: 31 Oct 2019

See all articles by Pasqualina Arca

Pasqualina Arca

Universita di Cagliari - Centre for North South Economic Research (CRENOS)

Gianfranco Enrico Atzeni

University of Sassari - Dip.to di Economia Impresa e Regolamentazione; Universita di Cagliari - Centre for North South Economic Research (CRENOS)

Luca Deidda

Università degli Studi di Sassari - Department of Economics and Business; Universita di Cagliari - Centre for North South Economic Research (CRENOS)

Date Written: 2013

Abstract

We analyze the effect of a bankruptcy law according to which some of the borrower’s assets are exempt from liquidation in the event of default in the context of a competitive credit market characterized either by moral hazard (MH) or by adverse selection (AS). In particular, we study how the level of such exemption affects the role of collateral depending on the dominant source of asymmetric information. Under MH, conditional on the level of exemption, the cost of credit is higher for borrowers who are requested to post collateral. Moreover, conditional on posting collateral, the cost of credit does not change with the level of asset exemption. Differently, in the case of AS, the decision to post collateral results in a lower cost of credit, whenever the equilibrium is separating. Finally, under AS, a higher level of exemption is generally associated with a lower level of credit rationing. Similarly, credit rationing either stays unchanged or goes down with exemption in the case of MH. We exploit cross State variability in the level of asset exemption from liquidation – according to personal bankruptcy US State laws prior to 2005 federal reform – in order to identify the signaling role played by collateral in a sample of american small business taken from the SBFF data.

Keywords: Bankruptcy, Collateral, Exemption levels, Moral hazard, Signal, Screening

JEL Classification: D82, G32, G33, and K35

Suggested Citation

Arca, Pasqualina and Atzeni, Gianfranco Enrico and Deidda, Luca, Economics of Bankruptcy Exemption: Signaling Value of Collateral, Cost of Credit and Access to Credit (2013). CRENOS Working Papers (quaderni di ricerca), Forthcoming. Available at SSRN: https://ssrn.com/abstract=3459379

Pasqualina Arca

Universita di Cagliari - Centre for North South Economic Research (CRENOS)

V. S. Ignazio 78
Cagliari, 09124
ITALY

Gianfranco Enrico Atzeni

University of Sassari - Dip.to di Economia Impresa e Regolamentazione ( email )

Viale Regina Margherita 15
07100 Sassari
Italy
39-079-228939 (Phone)

Universita di Cagliari - Centre for North South Economic Research (CRENOS) ( email )

V. S. Ignazio 78
Cagliari, 09124
Italy

Luca Deidda (Contact Author)

Università degli Studi di Sassari - Department of Economics and Business ( email )

via Muroni 25
Sassari, Sassari 07100
Italy

Universita di Cagliari - Centre for North South Economic Research (CRENOS) ( email )

Italy

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