Abstract

We present a control theory of collateral. Collateralization takes away the entrepreneur's control over an asset by preventing its restructuring. Prohibiting restructuring decreases the claim's value by increasing the probability of default but reduces the lender's loss given default. Assets that have a favorable relation between these two effects are suitable for collateral. Characteristics that imply a high financing capacity do not necessarily make assets good collateral, because the high financing capacity may be conditional on the asset not being collateralized. Core assets, assets of high specificity and those lacking fungibilit tend to be ill suited as collateral.