Bank of Finland research on moral hazard effect of collateralised loans
A Bank of Finland paper published on Friday examines borrowers' incentives to make repayments when loans are secured against costly and non-costly collateral when the value of the collateral varies.
Juha-Pekka Niinimäki, the paper's author, explores the effects of costly and non-costly collateral on borrowers when the value collateral is stochastic – not fully determinable and driven by a random element – and non-stochastic. Whereas non-costly collateral entails no cost to the borrower, under
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