Wealth, endogenous collateral quality, and financial crises

Zehao Liu and Andrew J. Sinclair

Journal of Economic Theory, 2022, vol. 204, issue C

Abstract: We propose a model of collateralized lending in which (1) borrowers endogenously determine collateral quality and (2) lenders can produce costly information about collateral payoffs. Our model yields several novel predictions: wealthier economies use lower quality collateral in equilibrium, have more severe financial crises, and have less frequent crises. We provide both micro and macro empirical evidence. In the U.S. mortgage market wealthier lenders accept lower quality collateral, and, looking across countries, wealthier economies use lower quality collateral and the collateral channel explains the link between wealth and crisis severity.

Keywords: Collateral quality; Financial crises; Crisis severity; Information acquisition; Wealth (search for similar items in EconPapers)
JEL-codes: D83 E32 E44 G01 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:204:y:2022:i:c:s0022053122001168

DOI: 10.1016/j.jet.2022.105526

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