Applied Economics Lunch Seminar

Du 31/10/2017 de 12:30 à 13:30

Salle R2-01, Campus Jourdan, 48 boulevard Jourdan, 75014 Paris

RANJBAR RAVASAN Farshad (PSE)

The excess burden of collateral

Developing a model of adverse selection with heterogeneous borrowers across risk and return dimensions, this paper shows that in developing countries that have poor institutional quality of collateral and bankruptcy laws, the aggressive collateralization makes the risk taking behavior of borrowers suboptimally more costly. This discourages entrepreneurship activities and thus hinders the potential growth among young firms with high impact on job creation in the economy. I provide the empirical evidence by investigating the performance of 76 cohorts of firms that entered the market between 1934 to 2009 during the fiscal year of 2012 in four MENA economies with weak collateral and bankruptcy laws. Matching data on the location of firms and bank branches, I construct the index for local collateral policy that prevails in the vicinity of each firm. I find that new enterprises expand their employment faster when they are located in areas in which banks with less stringent collateral policy have a stronger presence. They are also less likely to be discouraged from applying for a loan, more likely to have access to bank finance and more likely to make investments.