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THE USE OF COLLATERAL TO ENFORCE DEBT: PROFIT MAXIMIZATION
Author(s) -
HESS JAMES
Publication year - 1985
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/j.1465-7295.1985.tb01770.x
Subject(s) - collateral , profit maximization , economics , loan , microeconomics , profit (economics) , debt , maximization , monetary economics , finance
Collateral lowers the probability of default. This paper modifies the work of Benjamin (1978) by characterizing the competitive lender as a price‐taking profit maximizer rather than a profit eliminator. Most of Benjamin's results disappear when profit maximization is assumed; the results are corrected and extended. It is also suggested that the value of the collateral required for a standard loan is a variable that the loan market will adjust until long‐run expected profits from secured loans is driven to zero.