Collateral Equilibrium: A Basic Framework
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.
Geanakoplos, John and Zame, William R., "Collateral Equilibrium: A Basic Framework" (2013). Cowles Foundation Discussion Papers. 2290.