Destroying Collateral: Asset Security and the Financing of Firms

ISI: Destroying Collateral: Asset Security and the Financing of Firms


2015 - Applied Economics Letters - Vol. 22, Issue 9, Pp. 704 - 709


Posting collateral encourages credit provision under the assumption that lenders can appropriate the pledged assets in case of default. When institutions work imperfectly, though, banks discount the value of eective collateral, thereby reducing lending volume. This process has been described in U.S. states with dicult foreclosure procedures, but here we show that it also matters for poor countries after a violent conict, when collateralizable assets have a heightened probability of being destroyed. We use rm-level data on loans in Sub-Saharan Africa to show that to get a loan, rms in countries with recent conict need to pledge additional collateral. While some OLS oer supporting evidence, the eect is larger and more precisely estimated when we use quantile regressions to focus on the subgroup of rms that face tougher collateral requirements, which suggests that this eect is heterogeneous within countries. This mechanism is a novel channel that relates peace to economic growth and convergence through nancial markets


Mortgage, political risk, pledge-ability, social conict, economic recovery, peace dividend.

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