A lender-based theory of collateral

Roman Inderst and Holger M. Mueller

No 6, IMFS Working Paper Series from Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS)

Abstract: We consider an imperfectly competitive loan market in which a local relationship lender has an information advantage vis-à-vis distant transaction lenders. Competitive pressure from the transaction lenders prevents the local lender from extracting the full surplus from projects, so that she inefficiently rejects marginally profitable projects. Collateral mitigates the inefficiency by increasing the local lender’s payoff from precisely those marginal projects that she inefficiently rejects. The model predicts that, controlling for observable borrower risk, collateralized loans are more likely to default ex post, which is consistent with the empirical evidence. The model also predicts that borrowers for whom local lenders have a relatively smaller information advantage face higher collateral requirements, and that technological innovations that narrow the information advantage of local lenders, such as small business credit scoring, lead to a greater use of collateral in lending relationships.

Keywords: Collateral; Soft infomation; Loan market competition; Relationship lending (search for similar items in EconPapers)
JEL-codes: D82 G21 (search for similar items in EconPapers)
Date: 2006
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (19)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/97765/1/IMFS_WP_06.pdf (application/pdf)

Related works:
Journal Article: A lender-based theory of collateral (2007)
Working Paper: A Lender-Based Theory of Collateral (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:imfswp:6

Access Statistics for this paper

More papers in IMFS Working Paper Series from Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS) Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().