Bankruptcy and Collateral in Debt Constrained Markets

Timothy J. Kehoe () and David Levine ()

No 12656, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Typical models of bankruptcy and collateral rely on incomplete asset markets. In fact, bankruptcy and collateral add contingencies to asset markets. In some models, these contingencies can be used by consumers to achieve the same equilibrium allocations as in models with complete markets. In particular, the equilibrium allocation in the debt constrained model of Kehoe and Levine (2001) can be implemented in a model with bankruptcy and collateral. The equilibrium allocation is constrained efficient. Bankruptcy occurs when consumers receive low income shocks. The implementation of the debt constrained allocation in a model with bankruptcy and collateral is fragile in the sense of Leijonhufvud's "corridor of stability," however: If the environment changes, the equilibrium allocation is no longer constrained efficient.

JEL-codes: D50 D52 D61 G13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cfn and nep-dge
Date: 2006-10
Note: EFG CF
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Working Paper: Bankruptcy and collateral in debt constrained markets (2006)
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