Collateral Booms and Information Depletion
Luc Laeven () and
No 1064, Working Papers from Barcelona Graduate School of Economics
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 rm-level data in support of the model's main mechanism.
Keywords: credit booms; collateral; information production; crises; misallocation (search for similar items in EconPapers)
JEL-codes: E32 E44 G01 D80 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-ent, nep-fdg and nep-mac
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Working Paper: Collateral booms and information depletion (2019)
Working Paper: Collateral Booms and Information Depletion (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:bge:wpaper:1064
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