Collateral in Banking Policy and Adverse Selection
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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Volume (Year): 54 (1986)
Issue (Month): 4 (December)
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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.:
- Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
- 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.
- 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.
- 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.
- 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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