Collateral in Banking Policy and Adverse Selection
AbstractThis 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 InfoArticle provided by University of Manchester in its journal The Manchester School of Economic & Social Studies.
Volume (Year): 54 (1986)
Issue (Month): 4 (December)
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Postal: Manchester M13 9PL
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Web page: http://www.socialsciences.manchester.ac.uk/disciplines/economics/
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Other versions of this item:
- Gilroy, Bernard Michael & Broll, Udo, 1986. "Collateral in Banking Policy and Adverse Selection," MPRA Paper 18709, University Library of Munich, Germany.
- G1 - Financial Economics - - General Financial Markets
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- 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.
- Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
- 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.
- 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.
- 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.
- 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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