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Adverse Selection versus Moral Hazard in Financial Contracting: Evidence from collateralized and non-collateralized loans

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  • Hirofumi UCHIDA
  • Iichiro UESUGI
  • Hiromichi IWAKI

Abstract

We test the existence of adverse selection and moral hazard in financial contracting by examining the choice of borrowers between collateralized and non-collateralized loans. Using comprehensive loan-level data from all loans underwritten by a large public bank in Japan, we examine the borrowers' behavior before and after the introduction of non-collateralized loans that expand the choice set for borrowers. We find an increase in credit risk for firms that switch to non-collateralized loans after the introduction, which is consistent with moral hazard. In contrast, we find mixed and unclear evidence for the existence of adverse selection.

Suggested Citation

  • Hirofumi UCHIDA & Iichiro UESUGI & Hiromichi IWAKI, 2017. "Adverse Selection versus Moral Hazard in Financial Contracting: Evidence from collateralized and non-collateralized loans," Discussion papers 17058, Research Institute of Economy, Trade and Industry (RIETI).
    • Handle: RePEc:eti:dpaper:17058
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    References listed on IDEAS

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