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. (c) 2022 The Author(s). Published by Elsevier B.V. This is an open access article under the CC BY license ( http://creativecommons.org/licenses/by/4.0/ )

Automated summary

This study examines the costs and benefits of collateral requirements in bank lending markets characterized by asymmetric information. By utilizing credit registry data, the authors estimate a structural model to analyze firms' credit demand, banks' contract offering and pricing, and firm default. They find evidence that collateral helps mitigate adverse selection and moral hazard. Counterfactual experiments are conducted to quantify the propagation of adverse shocks to collateral values on credit supply, allocation, interest rates, default, and bank profits, highlighting the relative importance of pricing and rationing strategies employed by banks in response to such shocks.