American Economic Review: Vol. 104 No. 2 (February 2014)


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Collateral Crises

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Gorton, Gary, and Guillermo Ordoñez. 2014. "Collateral Crises." American Economic Review, 104(2): 343-78.

DOI: 10.1257/aer.104.2.343


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.

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Gorton, Gary (Yale U)
Ordoñez, Guillermo (U PA)

JEL Classifications

D83: Search; Learning; Information and Knowledge; Communication; Belief
E23: Macroeconomics: Production
E32: Business Fluctuations; Cycles
E44: Financial Markets and the Macroeconomy
G01: Financial Crises

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