Collateralized Debt as the Optimal Contract

Jeffrey Lacker

Review of Economic Dynamics, 2001, vol. 4, issue 4, 842-859

Abstract: In a multiple-good risk-sharing environment with ex post private information, conditions are found under which collateralized debt is the optimal contract. The necessary and sufficient condition is that the borrower values the collateral good more highly than does the lender; otherwise the optimal contract does not resemble debt. Limited collateral can give rise to an endogenous borrowing constraint, driving a further wedge between the intertemporal marginal rates of substitution of the borrower and the lender. (Copyright: Elsevier)

Keywords: debt; financial contracts; optimal contracts; collateral; asymmetric information; borrowing constraints (search for similar items in EconPapers)
JEL-codes: D82 G10 (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (37)

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Working Paper: Online Appendix to Collateralized Debt as the Optimal Contract (2001)
Working Paper: Collateralized debt as the optimal contract (1998)
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DOI: 10.1006/redy.2001.0138

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