The impact of information sharing on the use of collateral versus guarantees

By Ralph De Haas

Most small business lenders require borrowers to pledge some form of collateral or, if that’s not possible, a third-party guarantee. In this paper we look at how the introduction of a credit registry in Bosnia and Herzegovina affects the use of collateral versus guarantees. We find that among first-time borrowers, information sharing leads to a shift from collateral to guarantees. However, among repeat borrowers, both collateral and guarantee requirements decline in proportion to the length of the lending relationship. These results suggest that information sharing can reduce both adverse selection among new borrowers and hold-up problems among repeat borrowers.