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Collateralized debt as the optimal contract

Jeffrey Lacker ()

No 98-04, Working Paper from Federal Reserve Bank of Richmond

Abstract: In a simple risk-sharing environment with ex post private information, conditions are found under which a collateralized debt contract is the optimal allocation. The critical condition for optimality 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. I argue that perhaps all debt contracts are implicitly collateralized.

Keywords: Debt (search for similar items in EconPapers)
Date: 1998
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Published in Also published as 90-3R2

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Journal Article: Collateralized Debt as the Optimal Contract (2001) Downloads
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