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Collateral and reputation in a model of strategic defaults

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  • Lukyanov, Georgy

Abstract

This paper builds a finite-horizon model to study the role of physical collateral in a model of strategic defaults, when the borrower can develop reputation for honesty. Asset ownership increases attractiveness of the reputational channel: the borrower who would prefer to remain in autarky in the absence of the asset prefers to apply for collateralized debt. Pledging the asset as collateral facilitates reputation building, which is especially successful at the times of asset price drops, because these are the times when default is most tempting. The complementarity between secured and unsecured lending is especially pronounced when the ratio of the borrower's financial to non-financial income is neither too large nor too small.

Suggested Citation

  • Lukyanov, Georgy, 2023. "Collateral and reputation in a model of strategic defaults," Journal of Economic Dynamics and Control, Elsevier, vol. 156(C).
    • Handle: RePEc:eee:dyncon:v:156:y:2023:i:c:s0165188923001616
    DOI: 10.1016/j.jedc.2023.104755
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    More about this item

    Keywords

    Reputation; Default; Collateral;
    All these keywords.

    JEL classification:

    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • K35 - Law and Economics - - Other Substantive Areas of Law - - - Personal Bankruptcy Law
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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