This paper investigates the effect of real assets as collateral on the economy. I construct a model that shows how credit rationing is mitigated by the existence of bad firms whether it is linked to the value of distressed assets. Indeed, when loans are collateralized and firms are credit constrained, the amount borrowed is determined by the value of the collateral. The model builds on Stiglitz and Weiss (1981) and Shleifer and Vishny (1992) to show that there exists a link between firms' debt capacities and asset values in case of distress and the classical credit rationing model. Such as in the paper of Shleifer and Vishny, I endogenize the assets price. The price depends on whether there are firms that repurchase the assets. In fact, it depends on the number of bad firms in the economy as well as on the liquidity of good firms. In the model is possible to have a separating equilibrium only if there exists a number of bad firms that go bankrupt and if there exist good firms with sufficient liquidity. Each firm derives positive externalities from the existence of other firms. Indeed, the optimal leverage of firms depends on the possibility of repurchasing the assets.
