Knowledge that Transforms

I study the conditions under which assets are sold or used as collateral. Secured loans can be optimal by reducing the lender's incentives to acquire costly information about the future value of collateral assets. Furthermore, when the borrower has incentives to falsify the assets' quality, the assets cannot be sold but can be used as collateral via over-collateralization, and secured loans are optimal. However, under secured debts, the borrower may default strategically. Thus, an asset sale can be optimal under some conditions. In the paper, I also provide a theoretic explanation for the negative correlations between interest rates and haircuts.