“How Collateral Laws Shape Lending and Sectoral Activity”

Abstract

We investigate the effects of collateral laws for movable assets on lending and sectoral allocation. Using a unique cross-country micro-level loan dataset containing loan-to-value ratios for different asset classes, we find that loan-to-values of loans collateralized with movable assets are lower in countries with weak collateral laws, relative to immovable assets, and that lending is biased towards the use of immovable assets. Using sector-level output data, we find that weak movable collateral laws create distortions in the allocation of resources that favor immovable-based production. An analysis of Slovakia’s collateral law reform confirms our findings.