Collateral and Competition

We examine the effects of changes in competitive conditions on the structure of loan contracts. In particular, we present conditions in which greater loan market competition reduces the stringency of contractual collateral requirements, a prediction that is consistent with anecdotal evidence from loan markets. We also analyze the interaction between the degree of competition and the efficiency of contractual renegotiations. Insufficiently competitive markets may lead to bargaining difficulties that reduce the efficiency of renegotiable contracts. At low levels of competition negotiable contracts remain feasible only if collateral levels are set inefficiently low