Collateral and bank screening as complements: a spillover effect

Biswas, S. ORCID: https://orcid.org/0000-0003-3124-5070 (2023) Collateral and bank screening as complements: a spillover effect. Journal of Economic Theory, 212. 105703. ISSN 0022-0531 doi: 10.1016/j.jet.2023.105703

Abstract/Summary

I analyze a novel spillover effect from collateralized to uncollateralized loans. High-type borrowers have good projects, while low-type borrowers do not know their project quality. High-type borrowers post collateral, and a monopolist bank screens only low-type borrowers' projects. Different from existing models, equilibrium collateral requirements are stricter than the minimum necessary to achieve separation, even if collateral is costly. When high-type borrowers post more collateral, the bank charges a higher interest rate to low-type borrowers. This, in turn, enhances the bank's incentives to screen the low-types' projects, thereby improving the average quality of uncollateralized loans.

Item Type	Article
URI	https://reading-pure-test.eprints-hosting.org/id/eprint/123828
Identification Number/DOI	10.1016/j.jet.2023.105703
Refereed	Yes
Divisions	Henley Business School > Finance and Accounting Central Services
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