IDEAS home Printed from https://ideas.repec.org/p/ces/ceswps/_6731.html
   My bibliography  Save this paper

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.
    • Handle: RePEc:ces:ceswps:_6731
    as

    Download full text from publisher

    File URL: https://www.cesifo.org/DocDL/cesifo1_wp6731.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Rui Albuquerque & Hugo A. Hopenhayn, 2004. "Optimal Lending Contracts and Firm Dynamics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 71(2), pages 285-315.
    2. Kocherlakota, Narayana R., 1998. "Money Is Memory," Journal of Economic Theory, Elsevier, vol. 81(2), pages 232-251, August.
    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. Ricardo Lagos, 2011. "Asset Prices, Liquidity, and Monetary Policy in an Exchange Economy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s2), pages 521-552, October.
    6. Parikshit Ghosh & Debraj Ray, 1996. "Cooperation in Community Interaction Without Information Flows," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(3), pages 491-519.
    7. Ferraris, Leo & Watanabe, Makoto, 2008. "Collateral secured loans in a monetary economy," Journal of Economic Theory, Elsevier, vol. 143(1), pages 405-424, November.
    8. Lagos, Ricardo & Rocheteau, Guillaume, 2008. "Money and capital as competing media of exchange," Journal of Economic Theory, Elsevier, vol. 142(1), pages 247-258, September.
    9. 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.
    10. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
    11. Dean Corbae & Joseph Ritter, 2006. "Decentralized credit and monetary exchange without public record keeping," Studies in Economic Theory, in: Charalambos D. Aliprantis & Nicholas C. Yannelis & Gabriele Camera (ed.), Recent Developments on Money and Finance, pages 235-253, Springer.
    12. Kiminori Matsuyama, 2007. "Credit Traps and Credit Cycles," American Economic Review, American Economic Association, vol. 97(1), pages 503-516, March.
    13. 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.
    14. Takako Fujiwara-Greve & Masahiro Okuno-Fujiwara, 2009. "Voluntarily Separable Repeated Prisoner's Dilemma," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 76(3), pages 993-1021.
    15. ,, 2013. "The good, the bad, and the ugly: An inquiry into the causes and nature of credit cycles," Theoretical Economics, Econometric Society, vol. 8(3), September.
    16. Timothy J. Kehoe & David K. Levine, 1993. "Debt-Constrained Asset Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(4), pages 865-888.
    17. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
    18. Takahashi, Satoru, 2010. "Community enforcement when players observe partners' past play," Journal of Economic Theory, Elsevier, vol. 145(1), pages 42-62, January.
    19. Jan Eeckhout, 2006. "Minorities and Endogenous Segregation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(1), pages 31-53.
    20. Michihiro Kandori, 1992. "Social Norms and Community Enforcement," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(1), pages 63-80.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. 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.
    2. Lukas Altermatt & Kohei Iwasaki & Randall Wright, 2023. "General Equilibrium with Multiple Liquid Assets," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 51, pages 267-291, December.
    3. Joyee Deb & Takuo Sugaya & Alexander Wolitzky, 2020. "The Folk Theorem in Repeated Games With Anonymous Random Matching," Econometrica, Econometric Society, vol. 88(3), pages 917-964, May.
    4. Thomas Wiseman, 2015. "A Note on the Essentiality of Money under Limited Memory," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(4), pages 881-893, October.
    5. Makoto Watanabe & Vyacheslav Arbuzov & Yu Awaya & Hiroki Fukai, "undated". "Endogenous Repo Cycles," Tinbergen Institute Discussion Papers 19-019/VII, Tinbergen Institute.
    6. Tom Potoms & Tom Truyts, 2020. "Unhappy is the land without symbols - Group symbols in infinitely repeated public good games," Working Paper Series 1720, Department of Economics, University of Sussex Business School.
    7. Filip Vesely & Chun-Lei Yang, 2013. "On Optimal Social Convention in Voluntary Continuation Prisoner's Dilemma Games," CESifo Working Paper Series 4553, CESifo.
    8. Ed Nosal & Guillaume Rocheteau, 2006. "The economics of payments," Policy Discussion Papers, Federal Reserve Bank of Cleveland, issue Feb.
    9. Huber, Samuel & Kim, Jaehong, 2017. "On the optimal quantity of liquid bonds," Journal of Economic Dynamics and Control, Elsevier, vol. 79(C), pages 184-200.
    10. Matsuoka, Tarishi & Watanabe, Makoto, 2019. "Banking crises and liquidity in a monetary economy," Journal of Economic Dynamics and Control, Elsevier, vol. 108(C).
    11. Guillaume Rocheteau & Pierre‐Olivier Weill, 2011. "Liquidity in Frictional Asset Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(s2), pages 261-282, October.
    12. Kiyotaki, Nobuhiro & Lagos, Ricardo & Wright, Randall, 2016. "Introduction to the symposium issue on money and liquidity," Journal of Economic Theory, Elsevier, vol. 164(C), pages 1-9.
    13. Gomis-Porqueras Pedro & Sun Ching-Jen, 2020. "Fiat Money as a Public Signal, Medium of Exchange, and Punishment," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 20(2), pages 1-11, June.
    14. Venky Venkateswaran & Randall Wright, 2014. "Pledgability and Liquidity: A New Monetarist Model of Financial and Macroeconomic Activity," NBER Macroeconomics Annual, University of Chicago Press, vol. 28(1), pages 227-270.
    15. Rocheteau, Guillaume & Wright, Randall, 2013. "Liquidity and asset-market dynamics," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 275-294.
    16. Daniel Monte & Roberto Pinheiro, 2017. "Costly Information Intermediation as a Natural Monopoly," Working Papers (Old Series) 1721, Federal Reserve Bank of Cleveland.
    17. Tarishi Matsuoka & Makoto Watanabe, 2017. "Banking Panics and Liquidity in a Monetary Economy," Tinbergen Institute Discussion Papers 17-091/VII, Tinbergen Institute.
    18. Guillaume Rocheteau & Randall Wright & Cathy Zhang, 2018. "Corporate Finance and Monetary Policy," American Economic Review, American Economic Association, vol. 108(4-5), pages 1147-1186, April.
    19. Takako Fujiwara-Greve & Masahiro Okuno-Fujiwara & Nobue Suzuki, 2015. "Efficiency may improve when defectors exist," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 60(3), pages 423-460, November.
    20. Chao He & Randall Wright & Yu Zhu, 2015. "Housing and Liquidity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 435-455, July.

    More about this item

    Keywords

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

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_6731. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Klaus Wohlrabe (email available below). General contact details of provider: https://edirc.repec.org/data/cesifde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.