Product market effects of real estate collateral

- The paper studies show shocks to real estate collateral affect product market competition.
- Increases in collateral value lead to systematic future market share gains.
- Shocks to collateral lead to less competitive product markets.
- Effects of collateral depend on competitive interactions and rivals' access to financing.
- Results are stronger when real estate supply elasticity is used as instrument.

This paper exploits shocks to the value of real estate collateral to study how exogenous changes in firms' external financing capacity affect their competitive performance and industry dynamics. Firms with appreciating collateral tend to gain market share relative to their product market rivals. Shocks to collateral lead to less competitive product markets. The effects of collateral are stronger in markets where firms compete in strategic substitutes or face competitors with restricted access to external financing, and when real estate prices are instrumented with the interaction between housing supply constraints and mortgage rates. These results highlight the strategic importance of collateral.