TY  - JOUR
AU  - Gorton,Gary B.
AU  - Ordonez,Guillermo
TI  - Collateral Crises
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 17771
PY  - 2012
Y2  - January 2012
UR  - http://www.nber.org/papers/w17771
L1  - http://www.nber.org/papers/w17771.pdf
N1  - Author contact info:
Gary B. Gorton
Yale School of Management
135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
Fax: 203/432-8931
E-Mail: Gary.Gorton@yale.edu

Guillermo Ordonez
University of Pennsylvania
Department of Economics
428 McNeil Building
3718 Locust Walk
Philadelphia, PA 19104
Tel: (215) 898-8484
Fax: (215) 573-2057
E-Mail: ordonez@econ.upenn.edu
AB  - Short-term collateralized debt, such as demand deposits and money market instruments - 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 and consumption. Financial fragility builds up over time as information about counterparties decays.  A crisis occurs when a small shock then causes a large change in the information environment. Agents suddenly have incentives to produce information, asymmetric information becomes a threat and there is a decline in output and consumption. A social planner would produce more information than private agents, but would not always want to eliminate fragility.
ER  -