On markets where loans are secured by floating assets (accounts receivable, inventory, etc.), collateral cannot be used to screen borrowers or decrease moral hazard. The volatile nature of floating assets requires close monitoring. Monitoring supplies lenders with information on their borrowers, thus causing information asymmetry. We model a credit market with floating charges and find that lenders in these markets set interest rates according to a mixed strategy. Informed lenders earn positive informational rents on their low risk borrowers. The probability of switching of borrowers and the average interest rate lenders charge does not depend on the number of lenders or borrowers in the market. Mixed strategy equilibria might result in markets where lenders have portfolios with different ratios of low risk and high risk borrowers. If lenders in that case cannot distinguish between borrowers of the different lenders on the market, mixed strategy equilibria arise where lenders randomize their interest rates over different intervals. We show that on these markets mergers might be beneficial for borrowers, because they decrease the average interest rate for the majority of the borrowers. The lease market (US $ 318bn in 2013) and asset based lending market (US $ 83 bn in 2013) are examples of credit markets with floating charges. Competition on these markets is ill measured if one only considers measures like the markup or the Herfindahl-Hirschman index.
(Joint work with Casper de Vries.)