Collateral Crises

52 Pages Posted: 14 Jan 2012 Last revised: 18 Mar 2013

See all articles by Gary B. Gorton

Gary B. Gorton

Yale School of Management; National Bureau of Economic Research (NBER); Yale University - Yale Program on Financial Stability

Guillermo Ordoñez

University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 15, 2013

Abstract

Short-term collateralized debt, such as demand deposits and money market instruments - private money, is efficient if agents are willing to lend without producing costly information about the collateral backing the debt. When the economy relies on such informationally-insensitive debt, firms with low quality collateral can borrow, generating a credit boom and an increase in output and consumption. Financial fragility builds up over time as information about counter-parties decays. A crisis occurs when a small shock then causes a large change in the information environment. Agents suddenly have incentives to produce information, asymmetric information becomes a threat and there is a decline in output and consumption. A social planner would produce more information than private agents, but would not always want to eliminate fragility.

Keywords: Financial Crises, Financial Fragility, Short-term debt, Credit Booms

JEL Classification: E3, E32, E5

Suggested Citation

Gorton, Gary B. and Ordoñez, Guillermo, Collateral Crises (March 15, 2013). Available at SSRN: https://ssrn.com/abstract=1984715 or http://dx.doi.org/10.2139/ssrn.1984715

Gary B. Gorton (Contact Author)

Yale School of Management ( email )

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HOME PAGE: http://mba.yale.edu/faculty/profiles/gorton.shtml

National Bureau of Economic Research (NBER)

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Yale University - Yale Program on Financial Stability

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Guillermo Ordoñez

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
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Philadelphia, PA 19104-6297
United States

National Bureau of Economic Research (NBER) ( email )

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