COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 1906 Collateral Equilibrium: A Basic Framework John Geanakoplos and William R. Zame August 2013 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. |
