On the Use of Collateral

Paper number: 98/05

Paper date: 9th June 1998

Year: 1998

Paper Category: Discussion Paper

Authors

Giuseppe Coco
University of Exeter

Abstract

This paper surveys existing explanations for the use of collateral in credit markets and relates them to the empirical evidence on the subject. Collateral may be used as a screening or an incentive device in markets characterized by various forms of asymmetric and biased information. The evidence is incompatible with the use of collateral as a signal of projects' quality, while broadly consistent with explanations based on its incentive properties and asymmetric evaluation of projects.

JEL Classification Nos: D82; G14
Keywords: Collateral; credit market; rationing; asymmetric information

Corresponding Author: Giuseppe Coco, Department of Economics, University of Exeter, Streatham Court, Rennes Drive, Exeter, EX4 4PU, UK, tel: (44) 1392 264434, fax: (44) 1392 263242, email: G.Coco@exeter.ac.uk