Working Paper: CEPR ID: DP13905
Authors: Vasso Ioannidou; Nicola Pavanini; Yushi Peng
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.
Keywords: asymmetric information; structural estimation; credit markets; collateral
JEL Codes: D82; G21; L13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Collateral (Y20) | Adverse Selection (D82) |
| Borrowers' Sensitivity to Collateral (G21) | Demand for Secured Loans (G21) |
| Default Unobservables (C29) | Borrowers' Sensitivity to Collateral (G21) |
| Loan Interest Rates (E43) | Default Probability (C25) |
| Collateral (Y20) | Default Probability (C25) |
| Borrowers' Price Sensitivity (G21) | Demand for Loans (E41) |
| Default Unobservables (C29) | Borrowers' Price Sensitivity (G21) |