SFB 303 Discussion Paper No. A - 011
Author: Clemenz, Gerhard
Title: Credit Markets with Asymmetric Information and the Role of Collateral
Abstract: Bester (1984) has drawn attention to an important possibility in credit markets with asymmetric
information: The use of collateral as a screening and incentive device which could remove credit rationing in
equilibrium. It has turned out, however, that collateral variations cannot perform this function in general. One
important reason is that in many models iso-profit curves of the bank passing through a particular credit contract
are not less steep than the corresponding curves for borrowers. Together with the limited ability of loan
applicants to provide collateral this limits the effectiveness of the latter as a signal of trustworthiness. It seems
that asymmetric information continues to provide a fairly robust explanation for the possibility of equilibrium
credit rationing.
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Creation-Date: 1985
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