Endogeneity Issues in the Empirical Assessment of the Determinants of Loan Renegotiation
The present text is focused on the evaluation of the influence that determinants of loan contracts’ design may have on loan renegotiation. This general purpose is faced with the possible simultaneity of determination of some such factors (namely the use of collaterals and loan interest rate) and the likelihood of contract renegotiation. Naturally, this simultaneity corresponds to an issue of endogeneity of these factors within econometric models of the conditional probability of renegotiation. If neglected, covariates’ endogeneity causes model misspecification, translating into unreliable empirical assessments of the marginal effects of all renegotiation determinants on the probability of loan redesign. Building on the theory of incomplete contracts, suggesting that the possibility of contract renegotiation is already anticipated at the contracting date, the empirical findings of the paper, based on a dataset provided by a Brazilian bank, provide strong indication that this can indeed be the case. Accordingly, the empirical assessment of the marginal contributions of important variables to the likelihood of renegotiation is revisited, thereby enabling a deeper understanding of renegotiation processes.