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The use of collateral in formal and informal lending

  • Kislat, Carmen
  • Menkhoff, Lukas
  • Neuberger, Doris

The ex ante theory of collateral states that better informed lenders, such as informal lenders, rely less on collateral. We test this by contrasting the use of collateral between formal and informal lenders in the same market. Indeed, formal lenders rely more often on collateral, controlling for conventional determinants of collateral. Moreover, better information about borrowers has implications within lender groups: first, relationship lending reduces asymmetric information, but only for formal lenders who use collateral less with longer relationship; second, short distance between lender and borrower reduces asymmetric information, mainly for informal lenders who use collateral less at shorter distances.

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79765.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79765
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