Collateral and bank screening as complements: A spillover effect

Sonny Biswas*

*Corresponding author for this work

Research output: Contribution to journalArticle (Academic Journal)peer-review

Abstract

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.
Original languageEnglish
Article number105703
Number of pages25
JournalJournal of Economic Theory
Volume212
Early online date20 Jul 2023
DOIs
Publication statusPublished - 31 Jul 2023

Bibliographical note

Publisher Copyright:
© 2023 The Author(s)

Structured keywords

  • AF Banking
  • AF Corporate Finance

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