Yu Awaya*, Hiroki Fukai, Makoto Watanabe

*Corresponding author for this work

Research output: Contribution to JournalArticleAcademicpeer-review


This article presents a simple equilibrium model in which collateralized credit emerges endogenously. In a frictional world, where commitment is limited and agent's actions are not publicly observable, we show that collateral can serve as a credible device that prevents the participating parties from reneging. Our theory provides a microfoundation to justify the borrowing constraints that are widely used in the existing macroeconomic models. Using the model, we explain the payment puzzle. We also show that some assets are more suitable as collateral than others with different physical properties, for example, storable asset versus durable asset.

Original languageEnglish
Pages (from-to)1131-1151
JournalInternational Economic Review
Issue number3
Publication statusPublished - 2021

Bibliographical note

Funding Information:
We are grateful to Masaki Aoyagi, Vyacheslav Arbuzov, Narayana Kocherlakota, Neil Wallace, Randy Wright, three anonymous referees, and participants in the Summer Workshop on Money, Banking, Payments, and Finance, 2017 at the Bank of Canada, Kobe University, Kyushu University, Hokkaido University, Shanghai Forum 2018, Osaka University, Kyoto University, Tokyo Institute of Technology, and Japanese Economic Association Autumn Meeting 2018 for their helpful comments and encouragements. All remaining errors are ours. Awaya acknowledges financial support from NSF Grant (SES‐1626783). Fukai was supported by JSPS KAKENHI Grant Number JP19K13648.

Publisher Copyright:
© (2021) by the Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association

Copyright 2021 Elsevier B.V., All rights reserved.

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