Working Paper: CEPR ID: DP17286
Authors: Marc Flandreau; Stefano Pietrosanti; Carlotta E. Schuster
Abstract: During the hypothecation “mania” of 1849-1875, many sovereign borrowers relied on the posting of collateral such as, famously, Peruvian guano. But in fact, such “securities” could not be repossessed. To explain the puzzling phenomenon of sovereign hypothecation, which has a long history before and after the episode we consider, we emphasise an informational channel: Posting collateral produced information on opaque borrowers by displaying borrowers’ resources and behaviour. Drawing on a novel dataset and a careful exploration of the universe of individual hypothecations in London contracts, as well as of their context and of the institutional framework they created, we establish the pledges’ role in documenting sovereigns’ wealth, commitment to repay and management of revenue streams. Encasing disclosure in contracts written by lawyers while incentivising the truthfulness of data process through penalties explains investors’ readiness to pay a premium, an early case of “Big Data” supported lending.
Keywords: collateral; information; sovereign debt; property rights; financial innovation; legal engineering; state capacity
JEL Codes: G24; H63; K12; K33; N20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| collateralization (G33) | investor confidence (G24) |
| investor confidence (G24) | willingness to lend (G21) |
| collateralization (G33) | perceived quality of sovereign borrowers (F34) |
| non-enforceable hypothecations (G33) | yield premium (G12) |
| fiscal opacity (H69) | propensity to use hypothecations (G21) |
| hypothecated bonds (H74) | lower yields (Q15) |