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A Model of Collateral

Author

Listed:
  • Yu Awaya

    (University of Rochester)

  • Hiroki Fukai

    (Kyushu University)

  • Makoto Watanabe

    (Vrije Universiteit Amsterdam; Tinbergen Institute, The Netherlands)

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.

Suggested Citation

  • Yu Awaya & Hiroki Fukai & Makoto Watanabe, 2017. "A Model of Collateral," Tinbergen Institute Discussion Papers 17-098/VII, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20170098
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    References listed on IDEAS

    as
    1. Awaya, Yu, 2014. "Community enforcement with observation costs," Journal of Economic Theory, Elsevier, vol. 154(C), pages 173-186.
    2. Ferraris, Leo & Watanabe, Makoto, 2008. "Collateral secured loans in a monetary economy," Journal of Economic Theory, Elsevier, vol. 143(1), pages 405-424, November.
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    More about this item

    Keywords

    collateral; search; medium of exchange; voluntary separable repeated game;
    All these keywords.

    JEL classification:

    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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