Abstract

We examine the significance of the distortionary effect of the collateral requirement to investments in assets pledgeable for collaterals by small and medium-sized enterprises (SMEs). The theory predicts that the binding collateral constraint causes over-investment if the land price is expected to go up steeply while it causes under-investment otherwise. Our structural estimation of the Euler equation under a collateral constraint using the dataset on Japanese SMEs in the 1980s, in which the Japanese land price was skyrocketing, shows that the collateral constraint was not binding on average, whereas the estimation using data on the 1990s, during which the land price went down precipitously, shows that the constraint was binding and caused under-investment in the 1990s. This result indicates that the distortion in resource allocation resulting from the binding collateral constraint was a significant cause of the subsequent prolonged economic slump.

Talk to us

Join us for a 30 min session where you can share your feedback and ask us any queries you have

Schedule a call

Disclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.