Collaterals, Bank Monitoring and Performance: the Case of Newly Established Wine Farmers

This research aims at identifying the incentives associated to collaterals in an asymmetric information context and when the bank is the main financial partner of the entrepreneurs, which is typically the case for most farms and especially in the wine sector. In one hand, collaterals may reduce the risk of overinvestment by entrepreneurs and so reduce the risk of repayment default. In the other hand, to contract collaterals may lead the bank to reduce the monitoring effort. In this paper we test these two hypotheses in taking into account the fact that entrepreneurs can benefit from a banking relationship or not. Our results confirm that collaterals’ incentives depend on the bank monitoring. Moreover, this emphasizes the uniqueness of land mortgages. Besides, our results confirm that the revenue constraint is binding and thus, make critical the question of financial resources for newly established wine farmers.