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Collateral in Banking Policy and Adverse Selection

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  • Broll, Udo
  • Gilroy, Michael B

Abstract

This paper analyzes collateral in banking policy and adverse se lection effects given information asymmetry. It is shown that with asymmetric in formation, given the interest rate, one cannot expect collateral to equilibrate the market for loans. The reason is that the average riskiness of a loan will be positively related to the collateral agreement. Hence the gain for the bank fro m higher collateral will be compared with the adverse selection loss leading to an optimum collateral, which need not be market clearing. Copyright 1986 by Blackwell Publishers Ltd and The Victoria University of Manchester

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Bibliographic Info

Article provided by University of Manchester in its journal The Manchester School of Economic & Social Studies.

Volume (Year): 54 (1986)
Issue (Month): 4 (December)
Pages: 357-66

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Handle: RePEc:bla:manch2:v:54:y:1986:i:4:p:357-66

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  1. Smith, Bruce, 1983. "Limited Information, Credit Rationing, and Optimal Government Lending Policy," American Economic Review, American Economic Association, vol. 73(3), pages 305-18, June.
  2. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  3. Kletzer, Kenneth M, 1984. "Asymmetries of Information and LDC Borrowing with Sovereign Risk," Economic Journal, Royal Economic Society, vol. 94(374), pages 287-307, June.
  4. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
  5. Wette, Hildegard C, 1983. "Collateral in Credit Rationing in Markets with Imperfect Information: Note," American Economic Review, American Economic Association, vol. 73(3), pages 442-45, June.
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Cited by:
  1. Gilroy, Bernard Michael & Broll, Udo, 1988. "Market Behaviour, Information Asymmetries and Product Qualities," MPRA Paper 18655, University Library of Munich, Germany.

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