FIN-04-028 |
NYU Stern School of Business |
December 2004
Roman Inderst and Holger Mueller
ABSTRACT
We offer a novel explanation for collateral based on the notion that lenders make discretionary
credit decisions that are too conservative. There is no borrower asymmetric
information or moral hazard. Rather, the problem is that if lenders cannot extract the full
surplus from the projects they finance (e.g., due to credit market competition), they may reject
low-, but positive-NPV projects. Collateral provides lenders with additional protection
in bad states, thus improving their payoffs from projects with a relatively high likelihood of
bad states and thus precisely from those projects that are inefficiently rejected. Our model
is consistent with existing empirical evidence and provides new empirical predictions.
Roman Inderst
Institution: London School of Economics
Email: roman.inderst@insead.edu
Holger H. Mueller
Institution: Stern School of Business, New York University, 44th West 4th Street, New York, NY 10012
Telephone: (212) 998-0279
Fax: (212) 995-4233
Email: hmueller@stern.nyu.edu
Homepage:http://www.stern.nyu.edu/~hmueller
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