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Collateral and Asymmetric Information in Lending Markets

Vasso Ioannidou, Nicola Pavanini and Yushi Peng

No 13905, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 detailed credit registry data in a setting where asymmetric information problems in credit markets 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, and bank profits and how the severity of adverse selection influences this propagation.

Keywords: asymmetric information; Collateral; credit markets; structural estimation (search for similar items in EconPapers)
JEL-codes: D82 G21 L13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-cfn
Date: 2019-08
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