Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/97765
Authors: 
Inderst, Roman
Mueller, Holger M.
Year of Publication: 
2006
Series/Report no.: 
IMFS Working Paper Series 6
Abstract: 
We consider an imperfectly competitive loan market in which a local relationship lender has an information advantage vis-à-vis distant transaction lenders. Competitive pressure from the transaction lenders prevents the local lender from extracting the full surplus from projects, so that she inefficiently rejects marginally profitable projects. Collateral mitigates the inefficiency by increasing the local lender’s payoff from precisely those marginal projects that she inefficiently rejects. The model predicts that, controlling for observable borrower risk, collateralized loans are more likely to default ex post, which is consistent with the empirical evidence. The model also predicts that borrowers for whom local lenders have a relatively smaller information advantage face higher collateral requirements, and that technological innovations that narrow the information advantage of local lenders, such as small business credit scoring, lead to a greater use of collateral in lending relationships.
Subjects: 
Collateral
Soft infomation
Loan market competition
Relationship lending
JEL: 
D82
G21
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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