Collateral and Asymmetric Information in Lending Markets

We study the benefits and costs of collateral requirements in bank lending markets with asymmetric information. We estimate a structural model of firms’ credit demand for secured and unsecured loans, banks’ contract offering and pricing, and firm default using credit registry data in a setting where asymmetric information problems are pervasive. We provide evidence that collateral mitigates adverse selection and moral hazard. With counterfactual experiments, we quantify how an adverse shock to collateral values propagates to credit supply, credit allocation, interest rates, default, bank profits, and document the relative importance of banks’ pricing and rationing in response to this shock.