Financial Innovation, Collateral and Investment

Ana Fostel and John Geanakoplos

Working Papers from The George Washington University, Institute for International Economic Policy

Abstract: We show that financial innovations that change the collateral capacity of assets in the economy can affect investment even in the absence of any shift in utilities, productivity, or asset payoffs. First we show that the ability to leverage an asset by selling non-contingent promises can generate over-investment compared to the Arrow-Debreu level. Second, we show that the introduction of naked CDS can generate under-investment with respect to the Arrow-Debreu level. Finally, we show that the introduction of naked CDS can robustly destroy competitive equilibrium.

Keywords: Financial Innovation; Collateral Capacity; Investment; Leverage; Naked CDS; Collateral Equilibrium; Non-Existence (search for similar items in EconPapers)
JEL-codes: D52 D53 E44 G01 G10 G12 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2013-07
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:gwi:wpaper:2013-18

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