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Collateralized Debt as the Optimal Contract

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  • Jeffrey Lacker

    (Federal Reserve Bank of Richmond)

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)

Suggested Citation

  • Jeffrey Lacker, 2001. "Collateralized Debt as the Optimal Contract," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(4), pages 842-859, October.
    • Handle: RePEc:red:issued:v:4:y:2001:i:4:p:842-859
    DOI: 10.1006/redy.2001.0138
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    References listed on IDEAS

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    More about this item

    Keywords

    debt; financial contracts; optimal contracts; collateral; asymmetric information; borrowing constraints;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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