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Does Collateral Reduce Loan-Size Credit Rationing? Survey Evidence

Chala, Alemu Tulu LU and Forssbaeck, Jens LU (2018) In Working Papers
Abstract
In theory, the use of collateral in credit contracting should mitigate the information problems that are widely held to be the primary cause of credit rationing. However, direct empirical evidence of the link between collateral use and credit rationing is scant. This paper examines the relationship between collateral and credit rationing using survey data that provides clean measures of quantity and loan size rationing. We find that selection problems arising from the loan application process and co-determination of loan terms significantly influence the link between collateral and rationing. Accounting for these problems, our results suggest that collateral reduces the likelihood of experiencing loan-size credit rationing by between 15... (More)
In theory, the use of collateral in credit contracting should mitigate the information problems that are widely held to be the primary cause of credit rationing. However, direct empirical evidence of the link between collateral use and credit rationing is scant. This paper examines the relationship between collateral and credit rationing using survey data that provides clean measures of quantity and loan size rationing. We find that selection problems arising from the loan application process and co-determination of loan terms significantly influence the link between collateral and rationing. Accounting for these problems, our results suggest that collateral reduces the likelihood of experiencing loan-size credit rationing by between 15 and 40 percentage points, and that collateral also decreases the relative loan amount rationed. (Less)
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author
organization
publishing date
type
Working Paper
publication status
published
subject
keywords
Loan-Size rationing, Collateral, Small business, Information asymmetry, D82, G21, G39
in
Working Papers
issue
2018:36
pages
46 pages
language
English
LU publication?
yes
id
37f67781-4c50-4a0d-815f-46d815076fc4
alternative location
https://swopec.hhs.se/lunewp/abs/lunewp2018_036.htm
date added to LUP
2018-11-26 16:11:11
date last changed
2018-11-26 16:11:11
@misc{37f67781-4c50-4a0d-815f-46d815076fc4,
  abstract     = {In theory, the use of collateral in credit contracting should mitigate the information problems that are widely held to be the primary cause of credit rationing. However, direct empirical evidence of the link between collateral use and credit rationing is scant. This paper examines the relationship between collateral and credit rationing using survey data that provides clean measures of quantity and loan size rationing. We find that selection problems arising from the loan application process and co-determination of loan terms significantly influence the link between collateral and rationing. Accounting for these problems, our results suggest that collateral reduces the likelihood of experiencing loan-size credit rationing by between 15 and 40 percentage points, and that collateral also decreases the relative loan amount rationed. },
  author       = {Chala, Alemu Tulu and Forssbaeck, Jens},
  keyword      = {Loan-Size rationing,Collateral,Small business,Information asymmetry,D82,G21,G39},
  language     = {eng},
  note         = {Working Paper},
  number       = {2018:36},
  pages        = {46},
  series       = {Working Papers},
  title        = {Does Collateral Reduce Loan-Size Credit Rationing? Survey Evidence},
  year         = {2018},
}