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A Model of Collateral

Yu Awaya (), Hiroki Fukai and Makoto Watanabe ()

No 6731, CESifo Working Paper Series from CESifo

Abstract: This paper presents a simple equilibrium model in which collateralized credit emerges endogenously. Just like in repos, individuals cannot commit to the use of collateral as a guarantee of repayment, and both lenders and borrowers have incentives to renege. Our theory provides a micro-foundation to justify the borrowing constraints that are widely used in the existing macroeconomic models. We provide an explanation to the question of why assets are often used as collateral, rather than simply as a means of payment, why there is a tradeoff in assets between return and liquidity, and what kinds of assets are useful as collateral.

Keywords: collateral; search; medium of exchange; voluntary separable repeated game (search for similar items in EconPapers)
JEL-codes: E30 E50 C73 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-ban, nep-dge and nep-mac
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