collateral heterogeneity in risk attitude and the credit market equilibrium abstract this paper examines the argument that the availability of collateral rules out credit rationing a model of the credit market with ex ante asymmetric information and heterogeneous entrepreneurs attitudes toward risk is set up it is shown that due to the interplay between project choice and entrepreneurs preferences using collateral as a signal to screen safer projects may prove impossible instead a partially separating two contract equilibrium with rationing at one contract emerges contrary to previous theoretical research and consistently with conventional wisdom and systematic evidence the use of collateral is never negatively correlated with project risk

the incidence of secured debt evidence from the small business community critics claim that theories of secured debt fail to explain the widespread use of collateral because they incorrectly predict when a loan will be secured this paper provides the first rigorous statistical test of the transaction cost models of secured debt data from two samples of over 1 000 small business loans generally support the common set of predictions of these theories the incidence of secured debt is positively related to probability of default loan size loan maturity and marketability of assets changes in the legal and economic environment also alter firms decisions regarding the pledging of collateral

collateral loan quality and bank risk abstract most commercial loans are made on a secured basis yet little is known about the relationship between collateral and credit risk several theoretical studies find that when borrowers have private information about risk the lowest risk borrowers tend to pledge collateral in contrast conventional wisdom holds that when risk is observable the highest risk borrowers tend to pledge collateral an additional issue is whether secured loans as opposed to secured borrowers tend to be safer or riskier than unsecured loans empirical evidence presented here strongly suggests that collateral is most often associated with riskier borrowers riskier loans and riskier banks

moral hazard and secured lending in an infinitely repeated credit market game we analyze repeated moral hazard with discounting in a competitive credit market with risk neutrality even without learning or risk aversion long term bank borrower relationships are welfare enhancing the main result is that the borrower obtains an infinite sequence of unsecured loans at below spot market cost following the first good project realization this contract produces first best action choices prior to this stage the borrower gets secured loans with above market borrowing cost the optimal contract thus displays a selective memory feature taking only one of two forms at any given point in time depending on prior history we consider an infinitely repeated bank borrower relationship with moral hazard and universal risk neutrality and explore the ramifications of credit contract duration when the two well known benefits of long term contracting learning and improved risk sharing are absent our objectives are twofold the first is to analyze an infinitely repeated game with discounting in a credit market context we thus relate the theory of repeated games to financial intermediation theory particularly to issues of moral hazard and collateral related distortions the second objective is to understand noteworthy stylized facts of credit markets such as durability in credit relationships lower borrowing costs for established borrowers and unsecured loans for established borrowers versus secured loans for newer borrowers while these practices may be partly due to learning we show that learning is not essential to rationalize them even if information decays rapidly and banks learn nothing about borrowers through time these aspects of credit contracting arise in a repeated game context our main results are as follows first despite universal risk neutrality and the absence of learning a durable bank relationship benefits the borrower 2 the intuition is that the long term contracting permitted by a durable relationship enables the bank to efficiently tax and subsidize the borrower through time to reduce the use of costly collateral second the average welfare loss due to moral hazard per period is positive even as the time horizon goes to infinity third the optimal infinite horizon contract has the striking property that following the period

does deposit insurance increase banking system stability an empirical investigation based on evidence of 61 countries in 1980 97 the authors find that explicit deposit insurance tends to be detrimental to bank stability the more so where bank interest rates are deregulated and the institutional environment is weak the adverse impact of deposit insurance on bank stability tends to be stronger the more extensive is the coverage offered to depositors and where the scheme is funded and run by the government rather than the private sector

an ordinal shapley value for economic environments abstract we propose a new solution concept to address the problem of sharing a surplus among the agents generating it the problem is formulated in the preferences endowments space the solution is defined recursively incorporating notions of consistency and fairness and relying on properties satisfied by the shapley value for transferable utility tu games we show a solution exists and call it the ordinal shapley value osv we characterize the osv using the notion of coalitional dividends and furthermore show it is monotone and anonymous

secured lending and default risk equilibrium analysis policy implications and empirical results the authors examine collateral in a competitive equilibrium in which borrowers can choose hidden actions and may additionally possess hidden knowledge apart from explaining the widespread use of collateral despite deadweight costs they show that an increase in the riskless interest rate causes equilibrium loan rates and collateral requirements to increase a decline in the deadweight costs of collateral reduces the equilibrium collateral use under moral hazard and an increase in the borrower s project size reduces equilibrium collateral use under moral hazard some of these predictions are tested and found to be supported by the data copyright 1991 by royal economic society

competing networks and proprietary standards the case of quadraphonic sound quadraphonic audio systems failed to replace stereo in the 1970s despite backing from all the major manufacturers and recording houses network externalities played a significant role in this episode and the author uses the installed base model of j farrell and g saloner 1986 to explain quad s failure the author finds that the introduction of competing incompatible quadraphonic systems hindered the development of a viable user base and he argues that the systems sponsors introduced their products in a technologically premature state in order to prevent one another from preemptively establishing the quad standard as a result self fulfilling consumer and retailer expectations doomed quadraphonic sound copyright 1990 by blackwell publishing ltd

the european central bank independence accountability and strategy a review this paper reviews research on central banking and monetary policy with special emphasis on the position of the future european central bank nowadays it is often thought that an independent central bank with an explicit mandate to aim for price stability constitutes an important institutional device to assure price stability indeed the ecb will be one of the most independent central banks as follows from the codings of various indicators measuring legal independence still it does not follow straightforwardly from the literature that the statute of the ecb is optimal it is also argued that the accountability of the ecb is poorly arranged for in comparison with that of several national central banks finally the discussion about the monetary strategy of the ecb is reviewed

loan collateral corporate investment and business cycle abstract collateral and loan rates are observed to be highly cyclical in their use for bank lending the effects of such cyclicality on corporate investment are analyzed in this paper using a dynamic model we find that more collateral causes firms to select riskier safer projects if the loan rate rises above falls below the expected investment return we show that the incentive effect of loan rates becomes stronger with greater collateral with the two credit terms having larger incentive effects on lower quality firms these results offer a new explanation for why lenient collateral policies are associated with rising loan rates in economic upturns but stricter collateral requirements come with falling loan rates during downturns

asymmetric valuations and the role of collateral in loan agreements loan contracts with provision for collateral are of two general types in one the collateral may be an existing asset of the borrowing firm which is pledged to a lender in the event of default in this case collateral does not increase the assets that the borrower would lose if there is default since all the borrower s assets are attachable therefore the expected marginal cost to the borrower of providing an additional unit of collateral includes principally transactions costs associated with the collateral l this describes the usual type of commercial loan arrangement with the collateral being either equipment real estate accounts receivable or inventories in the other type of loan contract the collateral is an additional asset that is given up by the borrower if there is default that is in addition to the usual assets that are available to its lenders the borrower assigns as collateral to a creditor an asset that would normally not be legally attachable this arrangement is more common in small business loans that are secured by a personal asset e g a house of the entrepreneur likewise debt issued by a legally separate subsidiary may be secured by an asset of the parent firrn in these cases the expected marginal cost to the borrower the owner manager of the small firm or the parent corporation in the latter example of providing an additional unit of collateral

marriage and class here we consider a matching model where agents are heterogeneous and utilities nontransferable we utilize this framework to study how equilibrium sorting takes place in marriage markets we impose conditions that guarantee the existence of a steady state equilibrium and then characterize it several examples are developed to illustrate the richness of equilibria the model reveals an interesting sorting externality that can support multiple steady state equilibria even with constant returns to matching excerpt

collateral and competitive equilibria with moral hazard and private information the authors examine equilibrium credit contracts and allocations under different competitivity specifications and explain the economic roles of collateral under these specifications both moral hazard and adverse selection are considered the principal message is that how a competitive equilibrium is conceptualized significantly affects the characterization of equilibrium credit contracts specifically some well known results in the rationing literature are shown to rest delicately on the adopted equilibrium concept two somewhat surprising results emerge first high quality borrowers with unlimited collateral may be priced out of the market despite the bank having idle deposits second high quality borrowers may put up more collateral this paper explores the allocational consequences of alternative credit market competitivity specifications and explains the different economic roles of collateral under these specifications we model banks that lend to borrowers financing projects with payoffs depending on a priori unknown borrower attributes and ex post unobservable borrower actions borrowers are assumed to have unconstrained access to collateral our analysis is based on two concepts of competitive equilibrium under both banks compete in the sense that they earn zero expected profits however under the first concept of equilibrium ti as in jaffee and russell 11 all rents accrue to borrowers whereas under the second concept t2 all rents accrue to depositors as in stiglitz and weiss 17 our research makes two main points first we demonstrate that the manner in which a competitive equilibrium is conceptualized importantly influences the characterization of equilibrium credit allocations specifically one of the findings is that the rationing equilibria of stiglitz and weiss 17 and others should be viewed as rather delicate things in that they are very sensitive to the competitivity specification used for instance

the suspension of borrowing an implicit penalty for loan default under imperfect information abstracta credit seeker may be suspended from borrowing for a period of time due to a previous default such suspension is widely used in bank lending through credit check our work analyses the effects of suspension on the investment choice of borrowers under uncertainty and on the lending policy of banks facing asymmetric information we show that suspension should be tightened at low loan rates but loosened otherwise to improve the repayment performance of borrowers we also show that although credit rationing may not be completely removed due to imperfect information the excess demand for credit or transitive waiting in the market can actually be attenuated by such efficient use of suspension our theoretical predictions are consistent with observed cyclical patterns of changes in lendingrates and suspension severity

excess functions and nucleolus allocations of pure exchange economies abstract excess functions and nucleolus allocations are defined for pure exchange economies these allocations are shown to be a nonempty compact subset of the efficient allocations and are contained in the core when the core is nonempty a special class of excess functions based on the coefficient of resource utilization is investigated

uncertain search a model of search among technologies of uncertain values in the standard search problem there is an infinite pool of items whose distribution of values is known a decision maker draws an item from the pool observes its value and decides whether to keep it or to draw another item he can keep only one item and he seeks the item with the largest value in the standard uncertainty resolution problem there is only one item and the value of that item remains uncertain even after it is drawn the decision maker sequentially collects observations on the value of the item and decides whether to keep the item discard the item or take another observation uncertain search marries the sequential drawing from a pool of items from the search literature with the unknown value of a drawn item from the uncertainty resolution literature presented in the context of technology adoption it considers drawing from a pool of new technologies whose values remain unknown even after being drawn the decision maker sequentially purchases information in order to bayesianly update

distance and private information in lending we study the effects of physical distance on the acquisition and use of private information in informationally opaque credit markets using a unique data set of all loan applications by small firms to a large bank we show that borrower proximity facilitates the collection of soft information leading to a trade off in the availability and pricing of credit which is more readily accessible to nearby firms albeit at higher interest rates ceteris paribus analyzing loan rates and firms decision to switch lenders provides further evidence for banks strategic use of private information however distance erodes our lender s ability to collect proprietary intelligence and to carve out local captive markets suggesting that the requisite soft information is primarily local the author 2010 published by oxford university press on behalf of the society for financial studies all rights reserved for permissions please e mail journals permissions oxfordjournals org oxford university press

credit booms and lending standards evidence from the subprime mortgage market this paper links the u s subprime mortgage crisis to demand side factors that contributed to the rapid expansion of the u s mortgage market we show that denial rates were relatively lower in areas that experienced faster credit demand growth and that lenders in these high growth areas attached less weight to applicants loan to income ratios the results are robust to controlling for supply side factors including house price appreciation mortgage securitization and other economic fundamentals and to several robustness tests controlling for endogeneity the results are consistent with the notion that a relaxation of lending standards triggered by an increased demand for loans contributed to the boom and the ensuing crisis together with other supply side explanations these findings shed new light on the relationship between credit booms and financial instability

collateral and rationing sorting equilibria in monopolistic and competitive credit markets the authors examine how market structure affects credit allocation under universal risk neutrality and asymmetric information about borrowers they consider both monopolistic and perf ectly competitive banks and examine the role of collateral in each ca se when a bank is a monopolist on the loan side they find collatera l is never used and asymmetric information results in reduced bank le nding under perfect competition collateral has a useful sorting rol e moreover rationing is possible even with collateral availability and perfectly elastic deposit supply in this setting the authors sh ow co signers are valuable social welfare properties of the monopoly and competitive equilibria are also compared copyright 1987 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the communication requirements of social choice rules and supporting budget sets the paper examines the communication requirements of social choice rules when the sincere agents privately know their preferences it shows that for a large class of choice rules any minimally informative way to verify that a given alternative is in the choice rule is by verifying a budget equilibrium i e that the alternative is optimal to each agent within a budget set given to him therefore any communication mechanism realizing the choice rule must find a supporting budget equilibrium we characterize the class of choice rules that have this property furthermore for any rule from the class we characterize the minimally informative messages budget equilibria verifying it this characterization is used to identify the amount of communication needed to realize a choice rule measured with the number of transmitted bits or real variables applications include efficiency in convex economies exact or approximate surplus maximization in combinatorial auctions the core in indivisible good economies and stable many to one matchings

on the possibility of credit rationing in the stiglitz weiss model contrary to what is consistently assumed in the literature the return function cannot be hump shaped in the stiglitz weiss 1981 model this has important consequences for the possible occurrence of credit rationing and redlining with a single class of borrowers banks offer credit in two stages demand possibly exceeds supply in stage one but not in stage two with several observationally distinguishable borrower classes the firms in a borrower class are redlined only under circumstances which imply that they would not get credit in a perfect capital market either die rendite funktion kann im stiglitz weiss 1981 modell nicht so wie das in der literatur durchgangig angenommen wird hugelformig sein das hat wichtige implikationen fur die moglichkeit von kreditrationierung einerseits und fur die moglichkeit des ausschlusses ganzer kreditnehmergruppen vom kapitalmarkt andererseits mit nur einer klasse von kreditnehmern erfolgt die kreditvergabe in zwei stufen wahrend auf der ersten stufe eine ubernachfrage vorliegen kann herrscht auf der zweiten stufe marktraumung bei mehreren unterscheidbaren kreditnehmerklassen wird eine klasse nur unter den bedingungen vom kreditmarkt ausgeschlossen bei deren vorliegen sie auch in einem vollkommenen kreditmarkt keinen kredit erhalten wurde

group lending local information and peer selection this paper analyzes how group lending programs use joint liability to utilize local information that borrowers have about each other s projects through self selection of group members in the group formation stage these schemes are shown to lead to positive assortative matching in group formation faced with the same contract this makes the effective cost of borrowing lower to safer borrowers because they have safer partners conditional on success their expected dues to the lender are lower than that of riskier borrowers the resulting improvement in the pool of borrowers is shown to increase repayment rates and welfare q 1999 elsevier science b v all rights reserved

role of collateral and personal guarantees in relationship lending evidence from japan s sme loan market this paper investigates the determinants of the use of collateral and personal guarantees in japan s sme loan market we find that firms riskiness does not have a significant effect on the likelihood that collateral is used we find however that main banks whose claims are collateralized monitor borrowers more intensively and that borrowers who have a long term relationship with their main banks are more likely to pledge collateral these findings are consistent with the theory that the use of collateral is effective in raising the bank s seniority and enhances its screening and monitoring this incentive effect for the bank becomes tenuous for personal guarantees