Robust bubbles with mild penalties for default

Florin Bidian

Journal of Mathematical Economics, 2016, vol. 65, issue C, 141-153

Abstract: Limited enforcement of debt contracts and mild penalties for default can lead to low equilibrium interest rates, to ensure debt repayment. Low interest rates, in turn, create conditions for bubbles. I show that bubbles in unsecured private debt exist when the punishment for default is a permanent or a temporary interdiction to trade. Bubbles are an inefficient source of liquidity, as they lower interest rates and reduce welfare by discouraging saving.

Keywords: Bubbles; Self-enforcing debt; Inside liquidity; Outside liquidity; Endogenous debt limits; Risk-sharing (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:mateco:v:65:y:2016:i:c:p:141-153

DOI: 10.1016/j.jmateco.2015.04.002

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