A collateral constraint captures the idea that

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A collateral constraint implies that consumers need incentives not to abscond on their debts, as they have pledged assets as collateral for their loans. This is distinct from the budget constraint, which simply reflects the limit on a consumer's spending based on their income and prices. Asymmetric information in credit markets and the possibility that assets may be of no use can also be factors that influence a collateral constraint, but the core idea is that consumers have a stronger incentive to fulfill their obligations when their assets are at stake. Ricardian equivalence, which suggests that consumers will save more today to prepare for future tax liabilities, is not directly related to collateral constraints.

A Collateral Constraint Captures the Idea That