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A Model Of Collateral: Endogenizing The Borrowing Constraint

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  • Yu Awaya
  • Hiroki Fukai
  • Makoto Watanabe

Abstract

This article presents a simple equilibrium model in which collateralized credit emerges endogenously. In a frictional world, where commitment is limited and agent's actions are not publicly observable, we show that collateral can serve as a credible device that prevents the participating parties from reneging. Our theory provides a microfoundation to justify the borrowing constraints that are widely used in the existing macroeconomic models. Using the model, we explain the payment puzzle. We also show that some assets are more suitable as collateral than others with different physical properties, for example, storable asset versus durable asset.

Suggested Citation

  • Yu Awaya & Hiroki Fukai & Makoto Watanabe, 2021. "A Model Of Collateral: Endogenizing The Borrowing Constraint," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(3), pages 1131-1151, August.
    • Handle: RePEc:wly:iecrev:v:62:y:2021:i:3:p:1131-1151
    DOI: 10.1111/iere.12506
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    Cited by:

    1. Madison, Florian, 2024. "Asymmetric information in frictional markets for liquidity: Collateralized credit vs asset sale," Journal of Economic Dynamics and Control, Elsevier, vol. 159(C).

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