Download now Free registration required
Much of the lending in modern economies is secured by some form of collateral: residential and commercial mortgages, corporate bonds, mortgage-backed securities, and collateralized debt obligations 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, the particular collateral requirements (chosen by the social planner or by the market), and the scarcity of collateral have a profound impact on prices, on allocations, on the structure of markets, and especially on the efficiency of market outcomes. Some of these findings provide useful insights into housing and mortgage markets and into the sub-prime mortgage market in particular.
- Format: PDF
- Size: 403.5 KB