Collateral

What is collateral? What does it do? We set up a general model to illustrate the current thinking on these questions. The model captures classical ideas on how collateral improves bilateral enforcement by conveying rights of seizure that a creditor can exercise against a borrower. It also captures how collateral improves multilateral enforcement by conveying rights of exclusion that a creditor can exercise against other creditors, something we argue is especially useful to distinguish between secured and unsecured debt. The model sets the stage to analyze the restructuring of dispersed claims in and out of bankruptcy, which we describe in more specific models. The framework captures numerous empirical patterns even absent risk, dynamics, and asymmetric information. It thus suggests that those ingredients, while essential in applications, might not be fundamental to what collateral is and does.