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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)

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File URL: http://dx.doi.org/10.1006/redy.2001.0138
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Bibliographic Info

Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 4 (2001)
Issue (Month): 4 (October)
Pages: 842-859

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Handle: RePEc:red:issued:v:4:y:2001:i:4:p:842-859

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Related research

Keywords: debt; financial contracts; optimal contracts; collateral; asymmetric information; borrowing constraints;

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References

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  1. Oliver Hart & John Moore, 1998. "Default And Renegotiation: A Dynamic Model Of Debt," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(1), pages 1-41, February.
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  13. Jeffrey M. Lacker, 1989. "Limited commitment and costly enforcement," Working Paper, Federal Reserve Bank of Richmond 90-02, Federal Reserve Bank of Richmond.
  14. Barro, Robert J, 1976. "The Loan Market, Collateral, and Rates of Interest," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 8(4), pages 439-56, November.
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