Optimal Financial Exclusion

Cyril Monnet and Erwan Quintin ()

American Economic Journal: Microeconomics, 2021, vol. 13, issue 4, 101-34

Abstract: We study efficient exclusion policies in a canonical credit model that features both exogenous and strategic default along the equilibrium path. Policies that maximize welfare in a stationary equilibrium implement exclusion for a finite and deterministic number of periods following default. Front-loading exclusion makes the mass of socially valuable transactions as high as it can be in steady state. Less intuitively, doing so also maximizes the average welfare of excluded agents in equilibrium conditional on the level of incentives provided by the threat of exclusion. We argue that these results are robust to a host of natural variations on our benchmark model.

JEL-codes: C73 D53 D86 G21 G32 G51 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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DOI: 10.1257/mic.20190005

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