This paper presents a simple equilibrium model in which collateralized

credit emerges endogenously. Agents cannot commit to the use of collateral

as a guarantee of repayment, and both lenders and borrowers have

incentives to renege. Our theory provides a micro-foundation to justify

the borrowing constraints that are widely used in the existing

macroeconomic models. We explain why assets are often used as collateral,

rather than as a means of payment, even when these assets can be traded on

markets, why there is a tradeoff in assets between return and liquidity,

and what kinds of assets are useful as collateral.