Collateral and asymmetric information in lending markets
Ioannidou,V. Pavanini,Nicola Peng,Yushi
Ioannidou,V.
Pavanini,Nicola
Peng,Yushi
Abstract
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.
Description
Funding Information: Toni Whited was the editor for this article. We thank for useful suggestions Victor Aguirregabiria, Matteo Benetton, David De Meza, Chiara Fumagalli, Michel Habib, Florian Heider, Falk Laser, Steven Ongena, Bogdan Stacescu, Roberto Steri, and seminar participants at the Tilburg Structural Econometrics Group, 2018 Columbia GSB Junior Workshop in New Empirical Finance, CREDIT 2018 Conference (University of Venice), 2018 EARIE Annual Conference, University of Zurich, LSE IO Seminar, CREST Microeconometrics Seminar, 8th Israeli IO Day, 8th EIEF-UniBo-IGIER Bocconi Workshop in Industrial Organization, AFA 2019, IIOC 2019, 2019 Joint Bank of Canada-John Deutsch Institute Workshop on Financial Intermediation and Regulation, FIRS 2019, EFA 2019, ACPR Research Initiative (Bank of France). We thank Thomas Mosk for the prediction validation analysis using loan-level data from a Dutch bank that include detailed loan and borrower information of both accepted and rejected loan offers. Declaration of interest: none. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors. This paper formed Chapter 2 of Yushi Peng's doctoral dissertation at the University of Zurich. Publisher Copyright: © 2022 The Author(s)
Date
2022-04
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Keywords
asymmetric information, structural estimation, credit markets, collateral, D82 - Asymmetric and Private Information ; Mechanism Design, G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages, L13 - Oligopoly and Other Imperfect Markets
Citation
Ioannidou, V, Pavanini, N & Peng, Y 2022, 'Collateral and asymmetric information in lending markets', Journal of Financial Economics, vol. 144, no. 1, pp. 93-121. https://doi.org/10.1016/j.jfineco.2021.12.010