Collateral in Banking Policy and Adverse Selection

Gilroy, Bernard Michael and Broll, Udo (1986): Collateral in Banking Policy and Adverse Selection.

Abstract

This paper presents a theoretical model of lending which emphasizes the role of asymmetric information and total debt service obligations between creditors and debtors. The analytical approach is based upon that of Stiglitz and Weiss (1981); however, emphasis here is placed upon collateral policy aspects of credit contracts as compared to the interest rate policy aspects. It is demonstrated that under certain market constellations, even assuming a completely flexible collateral banking policy, the credit market may be characterized by a disequilibrium situation.

• Item Type: MPRA Paper
• Language: English
• Keywords: asymmetric information; banking; collateral policy
• Subjects: G - Financial Economics > G1 - General Financial Markets; D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D82 - Asymmetric and Private Information ; Mechanism Design; G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages

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