Rothschild/Stiglitz dominance and (in)compatibility of collateral in the presence of ex ante hidden information

We start from a classical borrower–lender relationship with limited liability and asymmetric information as to the risk of the underlying distribution. The paper analyzes the information aspect of collateral in the presence of ex ante hidden information (quality uncertainty). Risky projects are classified using Rothschild/Stiglitz dominance. The paper cannot confirm the positive role that the information economics literature generally accredits to collateral.