Securitization and Leverage in General Equilibrium

44 Pages Posted: 7 Oct 2013 Last revised: 1 Jul 2015

See all articles by Alexis Akira Toda

Alexis Akira Toda

University of California, San Diego (UCSD) - Department of Economics

Date Written: June 30, 2015


I develop a highly tractable dynamic general equilibrium model with collateralized lending and securitization in which asset-backed securities (ABS) function as a mechanism for risk sharing. Entrepreneurs who face aggregate and idiosyncratic investment risks can borrow from a menu of non-recourse loans offered by financial intermediaries by putting up their investments as collateral. The intermediaries pool debt contracts, issue ABS, and sell them to entrepreneurs. In addition to establishing equilibrium existence, I prove that in equilibrium only the lowest collateral loan market will be active and the entrepreneurs will leverage to maximum, leading to the endogenous emergence of "subprime" loans. Despite moral hazard by entrepreneurs, moderate collateral requirement improves welfare and economic growth.

Keywords: collateral, default, efficiency, growth, moral hazard, risk sharing

JEL Classification: D52, D53, D58, D9, G11, G21, G23

Suggested Citation

Toda, Alexis Akira, Securitization and Leverage in General Equilibrium (June 30, 2015). Available at SSRN: or

Alexis Akira Toda (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
Mail Code 0508
La Jolla, CA 92093-0508
United States

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