Re-using collateral A General Equilibrium Model of Rehypothecation∗

This paper considers an economy where agents face limited commitment and must transfer a durable asset as collateral to borrow. Rehypothecation allows lenders to re-sell this pledged asset or re-use it as collateral to sustain further borrowing. As such, it increases the ultimate supply of durable asset in the economy along collateralized credit chains. However, limited commitment now affects reusers since they effectively borrow the durable asset, limiting these benefits. I show that re-using collateral does not increase efficiency over an appropriate complete market benchmark. When some fundamental securities are missing, rehypothecation delivers strict welfare gains by relaxing collateral constraints. These gains appear significant in segmented markets where collateral scarcity issues are more acute. Finally, I show that rehypothecation also generates fragility along credit chains when aggregate leverage is high.