Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/253503 
Year of Publication: 
2022
Citation: 
[Journal:] Theoretical Economics [ISSN:] 1555-7561 [Volume:] 17 [Issue:] 1 [Publisher:] The Econometric Society [Place:] New Haven, CT [Year:] 2022 [Pages:] 185-217
Publisher: 
The Econometric Society, New Haven, CT
Abstract: 
This paper studies the optimal clearing arrangement for bilateral financial contracts in which an assessment of counterparty credit risk is crucial for efficiency. The economy is populated by borrowers and lenders. Borrowers are subject to limited commitment and hold private information about the severity of such lack of commitment. Lenders can acquire information, at a cost, about the commitment of their borrowers, which affects the assessment of counterparty risk. Clearing through a central counterparty allows lenders to mutualize counterparty credit risk, but this insurance may weaken incentives to acquire and reveal information. If information acquisition is incentive-compatible, then lenders choose central clearing. If it is not, they may prefer bilateral clearing either to prevent strategic default or to optimize the allocation of costly collateral.
Subjects: 
Limited commitment
central counterparties
collateral
JEL: 
G10
G14
G20
G23
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

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