Collateral Booms and Information Depletion

Martín, Alberto, Vladimir Asriyan and Luc Laeven
Authors registered in the RePEc Author Service: Alberto Martin

No 13340, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We develop a new theory of information production during credit booms. In our model, entrepreneurs need credit to undertake investment projects, some of which enable them to divert resources towards private consumption. Lenders can protect themselves from such diversion in two ways: collateralization and costly screening, which generates durable information about projects. In equilibrium, the collateralization-screening mix depends on the value of aggregate collateral. High collateral values raise investment and economic activity, but they also raise collateralization at the expense of screening. This has important dynamic implications. During credit booms driven by high collateral values (e.g. real estate booms), the economy accumulates physical capital but depletes information about investment projects. As a result, collateral-driven booms end in deep crises and slow recoveries: when booms end, investment is constrained both by the lack of collateral and by the lack of information on existing investment projects, which takes time to rebuild. We provide new empirical evidence using US firm-level data in support of the model’s main mechanism.

Keywords: Credit booms; Collateral; Information production; Crises; Missallocation (search for similar items in EconPapers)
JEL-codes: D80 E32 E44 G01 (search for similar items in EconPapers)
Date: 2018-11
New Economics Papers: this item is included in nep-dge, nep-ent, nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
https://cepr.org/publications/DP13340 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Collateral Booms and Information Depletion (2022)
Working Paper: Collateral booms and information depletion (2019)
Working Paper: Collateral booms and information depletion (2019)
Working Paper: Collateral booms and information depletion (2019)
Working Paper: Collateral Booms and Information Depletion (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:13340

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP13340

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().