Title:	Moral Hazard and Collateral as Screening Device: Empirical and Experimental Evidence
Number:	05-05
Author:	C. Mónica Capra, Matilde Fernández and Irene Ramírez-Comeig
Issue Date:	January 2005
Abstract:	This paper tests the separating role of contracts that involve both interest rates and collateral in credit markets with asymmetric information. To test this prediction data from real credit markets and controlled experiments are used. Using a sample of credits to small and medium-sized firms in Valencia, Spain, we relate two different types of contracts with an objective approximation to each ex ante borrower risk, i. e., the real outcome of each loan and other relevant variables. Moreover, two incentive compatible contracts are designed and decisions analyzed under two different experimental treatments, one with moral hazard. Results confirm that borrowers of lower risk choose contracts with higher collateral and a lower interest rate. However, it is ascertained that moral hazard reduces separation.

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