IDEAS home Printed from https://ideas.repec.org/p/wpa/wuwpfi/0411019.html
   My bibliography  Save this paper

Collateral and Competitive Equilibria with Moral Hazard and Private Information

Author

Listed:
  • Yuk-Shee Chan

    (University of Southern California)

  • Anjan V. Thakor

    (Olin School of Business, Washington University)

Abstract

The authors examine equilibrium credit contracts and allocations under different competitivity specifications and explain the economic roles of collateral under these specifications. Both moral hazard and adverse selection are considered. The principal message is that how a competitive equilibrium is conceptualized significantly affects the characterization of equilibrium credit contracts. Specifically, some well-known results in the rationing literature are shown to rest delicately on the adopted equilibrium concept. Two somewhat surprising results emerge. First, high-quality borrowers with unlimited collateral may be priced out of the market despite the bank having idle deposits. Second, high-quality borrowers may put up more collateral.

Suggested Citation

  • Yuk-Shee Chan & Anjan V. Thakor, 2004. "Collateral and Competitive Equilibria with Moral Hazard and Private Information," Finance 0411019, University Library of Munich, Germany.
    • Handle: RePEc:wpa:wuwpfi:0411019
    Note: Type of Document - pdf; pages: 20
    as

    Download full text from publisher

    File URL: https://econwpa.ub.uni-muenchen.de/econ-wp/fin/papers/0411/0411019.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Jaffee, Dwight M & Modigliani, Franco, 1969. "A Theory and Test of Credit Rationing," American Economic Review, American Economic Association, vol. 59(5), pages 850-872, December.
    2. Bhattacharya, Sudipto & Pfleiderer, Paul, 1985. "Delegated portfolio management," Journal of Economic Theory, Elsevier, vol. 36(1), pages 1-25, June.
    3. Myerson, Roger B, 1979. "Incentive Compatibility and the Bargaining Problem," Econometrica, Econometric Society, vol. 47(1), pages 61-73, January.
    4. Stephen A. Ross, 1977. "The Determination of Financial Structure: The Incentive-Signalling Approach," Bell Journal of Economics, The RAND Corporation, vol. 8(1), pages 23-40, Spring.
    5. Grossman, Sanford J & Hart, Oliver D, 1983. "An Analysis of the Principal-Agent Problem," Econometrica, Econometric Society, vol. 51(1), pages 7-45, January.
    6. Dwight M. Jaffee & Thomas Russell, 1976. "Imperfect Information, Uncertainty, and Credit Rationing," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 651-666.
    7. repec:bla:jfinan:v:44:y:1989:i:2:p:499-508 is not listed on IDEAS
    8. Chan, Yuk-Shee & Kanatas, George, 1985. "Asymmetric Valuations and the Role of Collateral in Loan Agreements," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(1), pages 84-95, February.
    9. Harris, Milton & Raviv, Artur, 1979. "Optimal incentive contracts with imperfect information," Journal of Economic Theory, Elsevier, vol. 20(2), pages 231-259, April.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Chala, Alemu Tulu & Forssbaeck, Jens, 2018. "Does Collateral Reduce Loan-Size Credit Rationing? Survey Evidence," Working Papers 2018:36, Lund University, Department of Economics.
    2. de La Bruslerie, H. & Deffains-Crapsky, C., 2008. "Information asymmetry, contract design and process of negotiation: The stock options awarding case," Journal of Corporate Finance, Elsevier, vol. 14(2), pages 73-91, April.
    3. Helmut Bester & Johannes Münster, 2016. "Subjective evaluation versus public information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 61(4), pages 723-753, April.
    4. Dirk Yandell, 1988. "Audit Information and Incentives for Efficiency," The American Economist, Sage Publications, vol. 32(1), pages 49-58, March.
    5. Gil-Bazo, Javier, 2001. "Portfolio management fees: assets or profits based compensation?," DEE - Working Papers. Business Economics. WB wb012207, Universidad Carlos III de Madrid. Departamento de Economía de la Empresa.
    6. Christopher S. Armstrong & David F. Larcker & Che-Lin Su, 2010. "Endogenous Selection and Moral Hazard in Compensation Contracts," Operations Research, INFORMS, vol. 58(4-part-2), pages 1090-1106, August.
    7. Mohamed Oudgou & Abdeslam Boudhar, 2023. "The bank–SME relationship and rationing risk reduction: an empirical study on survey data," SN Business & Economics, Springer, vol. 3(8), pages 1-39, August.
    8. David E. M. Sappington, 1991. "Incentives in Principal-Agent Relationships," Journal of Economic Perspectives, American Economic Association, vol. 5(2), pages 45-66, Spring.
    9. Michel Guillard, 1992. "Diversification incomplète et rationnements financiers," Revue Économique, Programme National Persée, vol. 43(2), pages 327-362.
    10. Innes, Robert, 1987. "Asymmetric Information And The Entrepreneurial Firm: Capital Structure, Investment And Government Intervention," Working Papers 225813, University of California, Davis, Department of Agricultural and Resource Economics.
    11. Yannis Karagiannis, 2007. "Foundational Economic Theories for Political-Scientific Inter-Branch Studies," RSCAS Working Papers 2007/16, European University Institute.
    12. Anil Aswani & Zuo-Jun Max Shen & Auyon Siddiq, 2019. "Data-Driven Incentive Design in the Medicare Shared Savings Program," Operations Research, INFORMS, vol. 67(4), pages 1002-1026, July.
    13. Duca, John V., 2013. "Did the commercial paper funding facility prevent a Great Depression style money market meltdown?," Journal of Financial Stability, Elsevier, vol. 9(4), pages 747-758.
    14. Inés Macho-Stadler & David Pérez-Castrillo, 2018. "Moral hazard: Base models and two extensions," Chapters, in: Luis C. Corchón & Marco A. Marini (ed.), Handbook of Game Theory and Industrial Organization, Volume I, chapter 16, pages 453-485, Edward Elgar Publishing.
    15. Gorman, Gary G. & Rosa, Peter J. & Faseruk, Alex, 2005. "Institutional lending to knowledge-based businesses," Journal of Business Venturing, Elsevier, vol. 20(6), pages 793-819, November.
    16. Gerhard Clemenz & Mona Ritthaler, 1992. "Credit markets with asymmetric information : a survey," Finnish Economic Papers, Finnish Economic Association, vol. 5(1), pages 12-26, Spring.
    17. Poitevin, Michel, 1989. "Information et marchés financiers : une revue de littérature," L'Actualité Economique, Société Canadienne de Science Economique, vol. 65(4), pages 555-589, décembre.
    18. Michael Krapp, 2000. "Relative Leistungsbewertung im dynamischen Kontext — Eine Analyse der Kollusionsproblematik bei wiederholter Delegation," Schmalenbach Journal of Business Research, Springer, vol. 52(3), pages 257-277, May.
    19. O’Connor, Matthew & Rafferty, Matthew & Sheikh, Aamer, 2013. "Equity compensation and the sensitivity of research and development to financial market frictions," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2510-2519.
    20. Boot, Arnoud & Thakor, Anjan V. & Udell, Gregory F., 1987. "Competition, risk neutrality and loan commitments," Journal of Banking & Finance, Elsevier, vol. 11(3), pages 449-471, September.

    More about this item

    JEL classification:

    • G - Financial Economics

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:0411019. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: EconWPA (email available below). General contact details of provider: https://econwpa.ub.uni-muenchen.de .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.