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Collateral in credit rationing in markets with asymmetric information

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  • Niinimäki, Juha-Pekka

Abstract

We study an incentive model of lending in which a borrower can pledge a personal asset as outside collateral. We examine how the value of the collateral affects the borrower’s incentives and the lender’s returns. In some scenarios moral hazard is avoided without the collateral but the introduction of the collateral may generate negative incentives. The borrower attempts to save his collateral asset by gambling for resurrection with the project output or by gambling with the value of the collateral. These negative incentives make credit rationing optimal. The findings provide recommendations on the optimal use of collateral.

Suggested Citation

  • Niinimäki, Juha-Pekka, 2018. "Collateral in credit rationing in markets with asymmetric information," The Quarterly Review of Economics and Finance, Elsevier, vol. 68(C), pages 97-102.
  • Handle: RePEc:eee:quaeco:v:68:y:2018:i:c:p:97-102
    DOI: 10.1016/j.qref.2017.10.001
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    More about this item

    Keywords

    Banking; Collateral; Credit rationing; Moral hazard; Gamble for resurrection;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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