Collateral Equilibrium: A Basic Framework

60 Pages Posted: 21 Aug 2013

See all articles by John Geanakoplos

John Geanakoplos

Yale University; Santa Fe Institute

William R. Zame

University of California, Los Angeles (UCLA) - Department of Economics

Date Written: August 20, 2013

Abstract

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.

Keywords: Collateral, Default, GEI

JEL Classification: D5

Suggested Citation

Geanakoplos, John D and Zame, William R., Collateral Equilibrium: A Basic Framework (August 20, 2013). Cowles Foundation Discussion Paper No. 1906, Available at SSRN: https://ssrn.com/abstract=2313103 or http://dx.doi.org/10.2139/ssrn.2313103

John D Geanakoplos (Contact Author)

Yale University ( email )

30 Hillhouse Avenue
New Haven, CT 06511
United States
203-432-3397 (Phone)

HOME PAGE: http://https://economics.yale.edu/people/faculty/john-geanakoplos

Santa Fe Institute ( email )

1399 Hyde Park Road
Santa Fe, NM 87501
United States

William R. Zame

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
Los Angeles, CA 90095-1477
United States
310-206-9463 (Phone)

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