Usury and Collateral Pricing: Towards an Alternative Explanation.

This paper studies the problem of collateral variation by the lender. The previous literature sug gested that collaterals will be underpriced to cover the risks from d efault. The authors show that this result is erroneous and was caused by a miscalculation of the default amount. Properly calculated, ther e is actually an "overpricing" of collateral by the lender. Underpr icing can come about only in the presence of interest-rate ceilings a nd interlinked markets. Copyright 1987 by Oxford University Press.