Collateral, Heterogeneity in Risk Attitude and the Credit Market Equilibrium

Giuseppe Coco

Discussion Papers from University of Exeter, Department of Economics

Abstract: This paper examines the argument that the availability of collateral rules out credit rationing. A model of the credit market with ex-ante asymmetric information and heterogeneous entrepreneurs' attitudes towards risk is set up. It is shown that, due to the interplay between project choice and entrepreneurs' preferences, using collateral as a signal to screen safer projects may prove impossible. Instead, a partially-separating two-contracts equilibrium with rationing at one contract emerges. Contrary to previous theoretical research and consistently with conventional wisdom and systematic evidence, the use of collateral is never negatively correlated with project risk.

Keywords: Collateral; credit rationing (search for similar items in EconPapers)
JEL-codes: D82 G14 (search for similar items in EconPapers)
Date: 1997
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Journal Article: Collateral, heterogeneity in risk attitude and the credit market equilibrium (1999)
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Persistent link: https://EconPapers.repec.org/RePEc:exe:wpaper:9702

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