Does collateral cause inefficient resource allocation?
This paper studies the determination of the optimal loan contracts and resource allocation in a competitive credit market with asymmetric information. It focuses on an economy with risky investment projects that require two goods as inputs, only one of which is accepted by lenders as collateral. Results show that low-risk entrepreneurs tend to choose contracts with a combination of more collateral and lower rates of interest. Under the circumstance that low-risk entrepreneurs have insufficient general capital (which is assumed to be accepted as collateral) to secure the loan, they are forced to face the binding collateral constraint. In order to finance their production projects, entrepreneurs tend to increase the size of loan and allocate a relatively high proportion of the general capital, leading to problems of inefficient resource allocation and over-borrowing in the credit market.
If 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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
References listed on IDEAS
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.:
- John Moore & Nobuhiro Kiyotaki, .
1995-5, Edinburgh School of Economics, University of Edinburgh.
- Wilson, Charles, 1977. "A model of insurance markets with incomplete information," Journal of Economic Theory, Elsevier, vol. 16(2), pages 167-207, December.
- Joe Peek & Eric S. Rosengren, 2003.
"Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan,"
NBER Working Papers
9643, National Bureau of Economic Research, Inc.
- Joe Peek & Eric S. Rosengren, 2005. "Unnatural Selection: Perverse Incentives and the Misallocation of Credit in Japan," American Economic Review, American Economic Association, vol. 95(4), pages 1144-1166, September.
- Chan, Yuk-Shee & Kanatas, George, 1985. "Asymmetric Valuations and the Role of Collateral in Loan Agreements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(1), pages 84-95, February.
- Fumio Hayashi & Edward C. Prescott, 2002.
"The 1990s in Japan: A Lost Decade,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 5(1), pages 206-235, January.
- Fumio Hayashi & Edward C. Prescott, 2002. "Data Appendix to The 1990s in Japan: A Lost Decade," Technical Appendices hayashi02, Review of Economic Dynamics.
- Fumio Hayashi & Edward C. Prescott, 2000. "The 1990s in Japan: a lost decade," Working Papers 607, Federal Reserve Bank of Minneapolis.
- Besanko, David & Thakor, Anjan V, 1987. "Collateral and Rationing: Sorting Equilibria in Monopolistic and Competitive Credit Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 28(3), pages 671-89, October.
- Barro, Robert J, 1976. "The Loan Market, Collateral, and Rates of Interest," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 8(4), pages 439-56, November.
- 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.
- Heitor Almeida & Murillo Campello, 2007. "Financial Constraints, Asset Tangibility, and Corporate Investment," Review of Financial Studies, Society for Financial Studies, vol. 20(5), pages 1429-1460, 2007 12.
- Chen, Yehning, 2006. "Collateral, loan guarantees, and the lenders' incentives to resolve financial distress," The Quarterly Review of Economics and Finance, Elsevier, vol. 46(1), pages 1-15, February.
- Allen N. Berger & Gregory F. Udell, 1988.
"Collateral, loan quality, and bank risk,"
Finance and Economics Discussion Series
51, Board of Governors of the Federal Reserve System (U.S.).
- Booth, James R. & Booth, Lena Chua, 2006. "Loan Collateral Decisions and Corporate Borrowing Costs," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(1), pages 67-90, February.
- Stiglitz, Joseph E & Weiss, Andrew, 1983. "Incentive Effects of Terminations: Applications to the Credit and Labor Markets," American Economic Review, American Economic Association, vol. 73(5), pages 912-27, December.
- Bester, Helmut, 1987. "The role of collateral in credit markets with imperfect information," European Economic Review, Elsevier, vol. 31(4), pages 887-899, June.
- Dorothea Schäfer & Oleksandr Talavera, 2009. "Small business survival and inheritance: evidence from Germany," Small Business Economics, Springer, vol. 32(1), pages 95-109, January.
- Yuk-Shee Chan & Anjan V. Thakor, 2004.
"Collateral and Competitive Equilibria with Moral Hazard and Private Information,"
- Chan, Yuk-Shee & Thakor, Anjan V, 1987. " Collateral and Competitive Equilibria with Moral Hazard and Private Information," Journal of Finance, American Finance Association, vol. 42(2), pages 345-63, 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.
- Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
- Coco, Giuseppe, 1999.
"Collateral, heterogeneity in risk attitude and the credit market equilibrium,"
European Economic Review,
Elsevier, vol. 43(3), pages 559-574, March.
- Coco, Guiseppe, 1997. "Collateral, Heterogeneity in Risk Attitude and the Credit Market Equilibrium," Discussion Papers 9702, Exeter University, Department of Economics.
- Schmidt-Mohr, Udo, 1997. "Rationing versus collateralization in competitive and monopolistic credit markets with asymmetric information," European Economic Review, Elsevier, vol. 41(7), pages 1321-1342, July.
- Gan, Jie, 2007. "Collateral, debt capacity, and corporate investment: Evidence from a natural experiment," Journal of Financial Economics, Elsevier, vol. 85(3), pages 709-734, September.
When requesting a correction, please mention this item's handle: RePEc:eee:jebusi:v:62:y::i:3:p:220-233. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.