Collateral booms and information depletion

Vladimir Asriyan, Luc Laeven and Alberto Martin

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We develop a new theory of information production during credit booms. Entrepreneurs need credit to undertake investment projects, some of which enable them to divert resources. Lenders can protect themselves from such diversion in two ways: collateralization and costly screening, which generates durable information about projects. In equilibrium, the collateralizationscreening mix depends on the value of aggregate collateral. High collateral values make it possible to reallocate resources towards productive projects, but they also crowd out screening. This has important dynamic implications. During credit booms driven by high collateral values (e.g., real estate booms), economic activity expands but the economy's stock of information on existing projects gets depleted. 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 projects, which takes time to rebuild. We provide empirical support for the mechanism using US firm-level data.

Keywords: Credit booms; collateral; information production; crises; misallocation. (search for similar items in EconPapers)
JEL-codes: D80 E32 E44 G01 (search for similar items in EconPapers)
Date: 2020-12, Revised 2019-01
New Economics Papers: this item is included in nep-dge, nep-fdg and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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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 (2018)
Working Paper: Collateral Booms and Information Depletion (2018)
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