Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/48629
Authors: 
Neus, Werner
Stadler, Manfred
Year of Publication: 
2011
Series/Report no.: 
University of Tübingen working papers in economics and finance 16
Abstract: 
In his basic model of debt renegotiation, BESTER [1994] argues that collateral is more effective if high risk projects are financed. This result, however, crucially depends on the definition of risk. Using the second-order stochastic dominance criterion introduced by ROTHSCHILD AND STIGLITZ [1970], we show that it is not a project's high risk, induced by a high probability of default, that makes collateral more effective. Instead it turns out that, given the expected return, the probability of default has no impact on the collateral's effectiveness. Moreover, a higher risk of the project caused by a higher loss given default makes the use of collateral even less effective.
Subjects: 
Debt renegotiation
Collateral
Risk
Stochastic dominance
JEL: 
D81
D82
G21
G32
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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