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Collateral and repeated lending

  • Artashes Karapetyan

    ()

    (Norges Bank (Central Bank of Norway))

  • Bogdan Stacescu

    ()

    (BI Norwegian Business School,)

Lending is often associated with significant asymmetric information issues between suppliers of funds and their potential borrowers. Banks can screen their borrowers, or can require them to post collateral in order to select creditworthy projects. We find that the potential for longer-term relationships increases banks' preference for screening. This is because posting collateral only provides the information that the current project of a given borrower is of good quality, whereas screening provides information that can be used in evaluating future projects as well as the current ones.

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File URL: http://www.norges-bank.no/en/Published/Papers/Working-Papers/2012/WP-201218/
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Paper provided by Norges Bank in its series Working Paper with number 2012/18.

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Length: 26 pages
Date of creation: 18 Dec 2012
Date of revision:
Handle: RePEc:bno:worpap:2012_18
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  1. 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.
  2. Ongena, Steven & Smith, David C., 2001. "The duration of bank relationships," Journal of Financial Economics, Elsevier, vol. 61(3), pages 449-475, September.
  3. Igawa, Kazuhiro & Kanatas, George, 1990. "Asymmetric Information, Collateral, and Moral Hazard," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(04), pages 469-490, December.
  4. Leeth, John D. & Scott, Jonathan A., 1989. "The Incidence of Secured Debt: Evidence from the Small Business Community," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(03), pages 379-394, September.
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