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A MODEL OF COLLATERAL: ENDOGENIZING THE BORROWING CONSTRAINT
Author(s) -
Awaya Yu,
Fukai Hiroki,
Watanabe Makoto
Publication year - 2021
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12506
Subject(s) - collateral , collateralized debt obligation , economics , constraint (computer aided design) , asset (computer security) , simple (philosophy) , general equilibrium theory , microeconomics , monetary economics , finance , computer science , mathematics , philosophy , computer security , epistemology , geometry
This article presents a simple equilibrium model in which collateralized credit emerges endogenously. In a frictional world, where commitment is limited and agent's actions are not publicly observable, we show that collateral can serve as a credible device that prevents the participating parties from reneging. Our theory provides a microfoundation to justify the borrowing constraints that are widely used in the existing macroeconomic models. Using the model, we explain the payment puzzle. We also show that some assets are more suitable as collateral than others with different physical properties, for example, storable asset versus durable asset.