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Endogenous debt constraints in collateralized economies with default penalties

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Date
2012
Dewey
Economie financière
Sujet
Ponzi schemes; Collateral; Debtconstraints; Default; Limited commitment; Incomplete markets; Infinite horizon economies
Journal issue
Journal of Mathematical Economics
Volume
48
Number
1
Publication date
2012
Article pages
1-13
Publisher
Elsevier
DOI
http://dx.doi.org/10.1016/j.jmateco.2011.09.006
URI
https://basepub.dauphine.fr/handle/123456789/8094
Collections
  • CEREMADE : Publications
Metadata
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Author
Vailakis, Yiannis
Martins-da-Rocha, Victor-Filipe
Type
Article accepté pour publication ou publié
Abstract (EN)
The objective of the paper is to propose endogenous debt constraints that rule out Ponzi schemes and ensure the existence of equilibria in a model with limited commitment and (possible) default. We appropriately modify the definition of finitely effective debt constraints, introduced by Levine and Zame (1996) (see also Levine and Zame (2002)), to encompass models with limited commitment, default penalties and collateral. Along this line, we introduce in the setting of Araujo et al. (2002), Kubler and Schmedders (2003) and Páscoa and Seghir (2009) the concept of actions with finite equivalent payoffs. We show that, independent of the level of default penalties, restricting plans to have finite equivalent payoffs rules out Ponzi schemes and guarantees the existence of an equilibrium that is compatible with the minimal ability to borrow and lend that we expect in our model. An interesting feature of our debt constraints is that they give rise to budget sets that coincide with the standard budget sets of economies having a collateral structure but no penalties (as defined in Araujo et al. (2002)). This illustrates the hidden relation between finitely effective debt constraints and collateral requirements.

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