Moral Hazard and Management of Debt Collateral in SME Financing: A Focus on Lease Contracts

This paper studies the effects of leasing on credit risk and access to credit. The repossession of a leased asset is generally easier than the enforcement of collateral associated with securing a standard loan agreement. We argue that this greater efficiency in enforcement mitigates, ceteris paribus, the counterparty’s moral hazard. To test this hypothesis, we developed a credit rationing model in which income is privately observed and non-verifiable, and financial intermediaries share credit risk information about borrowers. Financial contracts that are more rapidly enforced, such as in leasing, enable the screening of relatively safer projects or credit rationing reduction. We provide empirical evidence consistent with this prediction for the Italian credit market and considerations for the effects of monetary policy variables on the model’s equilibrium.