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The role of credit rationing and collateral in debt financing

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  • Houben, Eike
  • Nippel, Peter

Abstract

Credit rationing and the use of collateral are widely observed in debt financing. To our view there is yet no appropriate theoretical explanation for these facts. In the standard debt financing models the occurrence of credit rationing can be explained based on suitable assumptions. But those are by no means general. Furthermore, the use and the form of collateral is limited. In our model we show that credit rationing and the use of collateral are always necessary for debt financing if lenders are rational. We do so under less strict assumptions which are, to our understanding, much more realistic than those typical for standard adverse selection or moral hazard models. We assume that the borrower's opportunity set is "unbounded", at least from the viewpoint of the lender. This means that no arbitrary restrictions are imposed on the set of possible distributions of future cash flow from which the borrower can unobservably choose one. As a result a rational lender granting a pure debt should never take any risk, neither an exogenous one resulting from the project nor a an endogenous one resulting from the information asymmetry. Furthermore, we extend the set of possible collateral to property rights over physical and non physical assets, and explain how a superior lender's information can work as collateral.

Suggested Citation

  • Houben, Eike & Nippel, Peter, 2001. "The role of credit rationing and collateral in debt financing," Manuskripte aus den Instituten für Betriebswirtschaftslehre der Universität Kiel 547, Christian-Albrechts-Universität zu Kiel, Institut für Betriebswirtschaftslehre.
  • Handle: RePEc:zbw:cauman:547
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    References listed on IDEAS

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    1. Oliver Hart & John Moore, 1998. "Default and Renegotiation: A Dynamic Model of Debt," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 113(1), pages 1-41.
    2. Oliver Hart & John Moore, 1994. "A Theory of Debt Based on the Inalienability of Human Capital," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(4), pages 841-879.
    3. Ravid, S. Abraham & Spiegel, Matthew, 1997. "Optimal Financial Contracts for a Start-Up with Unlimited Operating Discretion," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 32(3), pages 269-286, September.
    4. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    5. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    6. Bester, Helmut, 1985. "Screening vs. Rationing in Credit Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 75(4), pages 850-855, September.
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    Cited by:

    1. Houben, Eike, 2002. "Venture capital, double-sided adverse selection, and double-sided moral hazard," Manuskripte aus den Instituten für Betriebswirtschaftslehre der Universität Kiel 556, Christian-Albrechts-Universität zu Kiel, Institut für Betriebswirtschaftslehre.

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    More about this item

    Keywords

    credit rationing; debt; asymmetric information; collateral;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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