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American Economic Review Vol. 104 No. 2 2014

Collateral Crises

Gary Gorton1; Guillermo Ordoñez2

1 School of Management, Yale University, 135 Prospect Street, Box 208200, New Haven, CT 06520, and NBER (e-mail: ) · 2 Department of Economics, University of Pennsylvania, 428 McNeil Building, 3718 Locust Walk, Philadelphia, PA, 19104, and NBER (e-mail: )

Abstract

Short-term collateralized debt, 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. Financial fragility is endogenous; it builds up over time as information about counterparties decays. A crisis occurs when a ( possibly small) shock causes agents to suddenly have incentives to produce information, leading to a decline in output. A social planner would produce more information than private agents but would not always want to eliminate fragility.

DOI
10.1257/aer.104.2.343
Volume
104
Issue
2
Pages
343-378
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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