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A Model of Collateral

Author

Listed:
  • Yu Awaya
  • Hiroki Fukai
  • Makoto Watanabe

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," CESifo Working Paper Series 6731, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_6731
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    File URL: https://www.cesifo-group.de/DocDL/cesifo1_wp6731.pdf
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    References listed on IDEAS

    as
    1. Takako Fujiwara-Greve & Masahiro Okuno-Fujiwara, 2009. "Voluntarily Separable Repeated Prisoner's Dilemma," Review of Economic Studies, Oxford University Press, vol. 76(3), pages 993-1021.
    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.
    3. Awaya, Yu, 2014. "Community enforcement with observation costs," Journal of Economic Theory, Elsevier, vol. 154(C), pages 173-186.
    4. Ferraris, Leo & Watanabe, Makoto, 2011. "Collateral fluctuations in a monetary economy," Journal of Economic Theory, Elsevier, vol. 146(5), pages 1915-1940, September.
    5. Parikshit Ghosh & Debraj Ray, 1996. "Cooperation in Community Interaction Without Information Flows," Review of Economic Studies, Oxford University Press, vol. 63(3), pages 491-519.
    6. Kiyotaki, Nobuhiro & Wright, Randall, 1991. "A contribution to the pure theory of money," Journal of Economic Theory, Elsevier, vol. 53(2), pages 215-235, April.
    7. Fujiwara-Greve, Takako & Okuno-Fujiwara, Masahiro & Suzuki, Nobue, 2012. "Voluntarily separable repeated Prisonerʼs Dilemma with reference letters," Games and Economic Behavior, Elsevier, vol. 74(2), pages 504-516.
    8. Timothy J. Kehoe & David K. Levine, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 865-888.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    collateral; search; medium of exchange; voluntary separable repeated game;

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • C73 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Stochastic and Dynamic Games; Evolutionary Games

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