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Collateral Equilibrium - A Basic Framework

Author

Listed:
  • John Geanakoplos

    (Yale University)

  • William Zame

    (University of California, Los Angeles)

Abstract

Much of the lending in modern economies is secured by some form of collateral; residential and commercial mortgages and corporate bonds are familiar examples. This paper builds an extension of general equilibrium theory that incorporates durable goods, collateralized securities and the possibility of default to argue that the reliance on collateral to secure loans and the particular collateral requirements chosen by the social planner or by the market have a profound impact on prices, allocations, market structure and the efficiency of market outcomes. These findings provide insights into housing and mortgage markets, including the sub-prime mortgage market.

Suggested Citation

  • John Geanakoplos & William Zame, 2013. "Collateral Equilibrium - A Basic Framework," EIEF Working Papers Series 1319, Einaudi Institute for Economics and Finance (EIEF), revised Aug 2013.
  • Handle: RePEc:eie:wpaper:1319
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    References listed on IDEAS

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