A model of borrower reputation as intangible collateral

In this paper, we build a framework which can generate endogenous fluctuations in downpayment requirements. We extend the model of Kiyotaki and Moore (1997) by considering an environment, in which savers can keep their anonymity but borrowers cannot. This allows lenders to punish defaulting borrowers by excluding them from future borrowing. They cannot however stop them from saving in the anonymous financial market. We show how the possibility of such market exclusion can lead to the emergence of intangible collateral in equilibrium alongside the tangible collateral which is usually studied in the literature. Fluctuations in the value of intangible collateral are isomorphic to fluctuations in the amount of borrowing firms can secure against the value of their tangible assets. We find that, when we combine the intangible collateral mechanism in our paper with counter-cyclical variance of idiosyncratic productivity shocks, this helps to generate realistic negative co-movement of downpayment requirements and aggregate output over the business cycle. In this case, the presence of intangible collateral increases the amplification of business cycle fluctuations relative to the standard Kiyotaki-Moore (1997) model.