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Credit rationing and asset value

Antonio Affuso

No 2006-EP04, Economics Department Working Papers from Department of Economics, Parma University (Italy)

Abstract: This paper investigates the effect of real assets as collateral on the economy. I show how credit rationing is mitigated by the exsistence of bad firms whether it is linked to the value of distressed assets. Indeed, when loans are collateralized and firms are credit constrained, the amount borrowed is determined by the value of the collateral. The model builds on Stiglitz and Weiss (1981) and Shleifer and Vishny (1992) to show that there exists a link between firms’ debt capacities and asset values in case of distress and the classical credit rationing model. Such as in the paper of Shleifer and Vishny, I endogenize the assets price. The price depends on whether there are firms that repurchase the assets. In fact, it depends on the number of bad firms in the economy as well as on the liquidity of good firms. I show that is possible to have a separating equilibrium only if there exists a number of bad firms that go bankrupt and if there exist good firms with sufficient liquidity. Each firm derives positive externalities from the existence of other firms. Indeed, the optimal leverage of firms depends on the possibility of repurchasing the assets. In this model the financial intermediaries play a role because they arise as internal markets for assets.

Keywords: Adverse selection; credit rationing; real assets; asymmetric information; public subsidies (search for similar items in EconPapers)
JEL-codes: D82 H23 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-pbe
Date: 2006
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Journal Article: Credit Rationing and Asset Value (2008) Downloads
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