Moral Hazard in Credit Markets: The Incentive Effect of Collateral

Download here the paper.

Time: 2011, Tuesday March 8, 13.00-14.00 hours
Location: CPB-office, Van Stolkweg 14, The Hague

Presentation: Marta Serra-Garcia (Tilburg University)

Discussant: Gijsbert Zwart (CPB)

Language: English

Registration: Please register by sending an email to seminars@cpb.nl.

Abstract subject: This paper examines the effect of collateral on moral hazard and credit volume. A standard theoretical argument for the use of collateral is its power in reducing problems of moral hazard. However, collateral may also be used as a screening device and existing empirical studies have not isolated the incentive effect of collateral. This paper uses experimental tools to identify the effect. The results show that collateral significantly decreases moral hazard when interest rates are low. Interestingly, if interest rates are high, it does not. The results suggest that borrowers' loss aversion offsets the incentive effect of collateral when interest rates are high. Importantly, collateral increases credit supply. But, if interest rates are high, increases in collateral also lead to a decrease in credit demand. These findings suggest that, in credit markets with high interest rates, the effect of collateral on moral hazard and credit volume may be weaker than expected.

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