Moral hazard in the credit market when the collateral value is stochastic
AbstractThis theoretical paper explores the effects of costly and non-costly collateral on moral hazard, when collateral value may fluctuate. Given that all collateral is costly, stochastic collateral will entail the same positive incentive effects as nonstochastic collateral, provided the variation in collateral value is modest. If it is large, the incentive effects are smaller under stochastic collateral. With non-costly collateral, stochastic collateral entails positive incentive effects or no effects, if the variation in collateral value is modest. If it is large, the incentive effects may be positive or negative. Thus, collateral can increase moral hazard. The findings are related to the topical subprime crisis and the fluctuating value of real estate collateral.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Bank of Finland in its series Research Discussion Papers with number 22/2010.
Length: 24 pages
Date of creation: 21 Dec 2010
Date of revision:
banking; collateral; moral hazard; subprime lending;
Find related papers by JEL classification:
- G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-01-30 (All new papers)
- NEP-BAN-2011-01-30 (Banking)
- NEP-CTA-2011-01-30 (Contract Theory & Applications)
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.:
- Manove, Michael & Padilla, A Jorge & Pagano, Marco, 2001. "Collateral versus Project Screening: A Model of Lazy Banks," RAND Journal of Economics, The RAND Corporation, vol. 32(4), pages 726-44, Winter.
- Bester, H., 1990.
"The Role Of Collateral In A Model Of Debt Renegotiation,"
9060, Tilburg - Center for Economic Research.
- Bester, Helmut, 1994. "The Role of Collateral in a Model of Debt Renegotiation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 26(1), pages 72-86, February.
- Bester, H., 1990. "The Role of Collateral in a Model of Debt Renegotiation," Discussion Paper 1990-60, Tilburg University, Center for Economic Research.
- Helmut Bester, 1990. "The Role of Collateral in a Model of Debt Renegotiation," CEPR Financial Markets Paper 0001, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
- Gerhard Clemenz & Mona Ritthaler, 1992. "Credit markets with asymmetric information : a survey," Finnish Economic Papers, Finnish Economic Association, vol. 5(1), pages 12-26, Spring.
- Erik Lehmann & Doris Neuberger & Solvig R”thke, 2004. "Lending to Small and Medium-Sized Firms: Is There an East-West Gap in Germany?," Small Business Economics, Springer, vol. 23(1), pages 23-39, 08.
- Esa Jokivuolle & Samu Peura, 2003. "Incorporating Collateral Value Uncertainty in Loss Given Default Estimates and Loan-to-value Ratios," European Financial Management, European Financial Management Association, vol. 9(3), pages 299-314.
- Jimenez, Gabriel & Salas, Vicente & Saurina, Jesus, 2006. "Determinants of collateral," Journal of Financial Economics, Elsevier, vol. 81(2), pages 255-281, August.
- Menkhoff, Lukas & Neuberger, Doris & Suwanaporn, Chodechai, 2006.
"Collateral-based lending in emerging markets: Evidence from Thailand,"
Journal of Banking & Finance,
Elsevier, vol. 30(1), pages 1-21, January.
- Lukas Menkhoff & Doris Neuberger & Chodechai Suwanaporn, 2005. "Collateral-Based Lending in Emerging Markets: Evidence from Thailand," Finance 0501008, EconWPA.
- Juha-Pekka Niinimäki & Tuomas Takalo, 2007. "Benchmarking and Comparing Entrepreneurs with Incomplete Information," Finnish Economic Papers, Finnish Economic Association, vol. 20(2), pages 91-107, Autumn.
- Bester, Helmut, 1987. "The role of collateral in credit markets with imperfect information," European Economic Review, Elsevier, vol. 31(4), pages 887-899, June.
- Diamond, Douglas W, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Wiley Blackwell, vol. 51(3), pages 393-414, July.
- Lehmann, Erik & Neuberger, Doris, 2001.
"Do lending relationships matter?: Evidence from bank survey data in Germany,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 45(4), pages 339-359, August.
- Erik Lehmann & Neuberger, Doris, 2000. "Do Lending Relationships Matter? Evidence from Bank Survey Data in Germany," CoFE Discussion Paper 00-04, Center of Finance and Econometrics, University of Konstanz.
- Bell, Clive & Clemenz, Gerhard, 2006. "The desire for land: Strategic lending with adverse selection," Journal of Development Economics, Elsevier, vol. 79(1), pages 1-25, February.
- 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.
- Clive BELL & Gerhard CLEMENZ, 1996.
"Credit Markets with Moral Hazard and Heterogenous Valuations of Collateral,"
Vienna Economics Papers
vie9604, University of Vienna, Department of Economics.
- Bell, Clive & Clemenz, Gerhard, 1998. "Credit markets with moral hazard and heterogeneous valuations of collateral," Research in Economics, Elsevier, vol. 52(3), pages 285-309, September.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Minna Nyman).
If references are entirely missing, you can add them using this form.