The Design of Optimal Collateralized Contracts
Dan Cao () and
Roger Lagunoff ()
Additional contact information
Roger Lagunoff: Department of Economics, Georgetown University, http://www.georgetown.edu/lagunoff/lagunoff.htm
No gueconwpa~16-16-01, Working Papers from Georgetown University, Department of Economics
This paper presents a two-period optimal contracting model of collateral. A borrower values a capital good and a composite non-capital good. He privately observes an income shock in the composite good in the second period. Collateralization of both goods occurs in the optimal contract, whereas it does not under full information. Relative to full information, the capital good in the optimal contract is over-consumed in the initial loan period and under-consumed in the repayment period. The relation between forfeiture of assets and contractual distortion is summarized by a formula showing higher distortions associated with larger increases in forfeited collateral. Forfeiture is decreasing in income at the tails of the income distribution, and low income types forfeit more than high income types. We obtain a closed form solution in a parameterized model. Forfeited collateral is globally decreasing in income with pooling at the bottom when the borrower's initial assets are low.
Keywords: Optimal contract; asymmetric information; collateral; forfeiture; collateralized contract. (search for similar items in EconPapers)
JEL-codes: D82 D86 D53 D14 G21 G22 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cta and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations Track citations by RSS feed
Downloads: (external link)
http://faculty.georgetown.edu/lagunofr/Collateral.pdf Full text (application/pdf)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: http://EconPapers.repec.org/RePEc:geo:guwopa:gueconwpa~16-16-01
Ordering information: This working paper can be ordered from
Roger Lagunoff Professor of Economics Georgetown University Department of Economics Washington, DC 20057-1036
Access Statistics for this paper
More papers in Working Papers from Georgetown University, Department of Economics Georgetown University Department of Economics Washington, DC 20057-1036.
Series data maintained by Marcia Suss ().