On the use of collateral

This paper surveys existing explanations for the pervasive use of collatera l in credit markets and relates them to the empirical evidence on the subje ct. Collateral may be used as a screening or an incentive device in markets characterized by various forms of asymmetric and biased information. The e vidence is incompatible with the use of collateral as a signal of projects' quality, while broadly consistent with explanations based on its incentive propel-ties and asymmetric evaluation of projects.