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Collateral booms and information depletion

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Abstract

We develop a new theory of information production during credit booms. Entrepreneurs need credit to undertake investment projects, some of which enable them to divert resources. Lenders can protect themselves from such diversion in two ways: collateralization and costly screening, which generates durable information about projects. In equilibrium, the collateralizationscreening mix depends on the value of aggregate collateral. High collateral values make it possible to reallocate resources towards productive projects, but they also crowd out screening. This has important dynamic implications. During credit booms driven by high collateral values (e.g., real estate booms), economic activity expands but the economy's stock of information on existing projects gets depleted. As a result, collateral-driven booms end in deep crises and slow recoveries: when booms end, investment is constrained both by the lack of collateral and by the lack of information on existing projects, which takes time to rebuild. We provide empirical support for the mechanism using US firm-level data.

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  • Vladimir Asriyan & Luc Laeven & Alberto Martin, 2020. "Collateral booms and information depletion," Economics Working Papers 1622, Department of Economics and Business, Universitat Pompeu Fabra, revised Jan 2019.
    • Handle: RePEc:upf:upfgen:1622
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    1. Collateral Booms and Information Depletion
      by Christian Zimmermann in NEP-DGE blog on 2018-12-13 15:49:27

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    18. Matt Darst & Ehraz Refayet & Alexandros Vardoulakis, 2020. "Banks, Non Banks, and Lending Standards," Finance and Economics Discussion Series 2020-086, Board of Governors of the Federal Reserve System (U.S.).
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    More about this item

    Keywords

    Credit booms; collateral; information production; crises; misallocation.;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General

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