Why do Borrowers Pledge Collateral? New Empirical Evidence on the Role of Asymmetric Information,” Working Paper, FRB of Atlanta

An impressive theoretical literature motivates collateral as a mechanism that reduces equilibrium credit rationing and other problems arising from asymmetric information between borrowers and lenders. However, there is no clear empirical evidence regarding the central implication of this theory – that a reduction in asymmetric information reduces the incidence of collateral. We provide such evidence by exploiting exogenous variation in lender information sets related to their adoption of a new information technology, and comparing collateral outcomes before and after adoption. Our results are consistent with the central implication of the theoretical models, and may also have efficiency and macroeconomic implications