 Production, bankruptcy, and financial policies under collateral constraintsMiguel Leon-Ledesma and Jaime Orrillo Mathematical Social Sciences, 2021, vol. 112, issue C, 109-119 Abstract: We propose an extension of the incomplete markets general equilibrium model with production to situations in which firms can default (bankruptcy). In the model, firms are owned by a single individual whose roles as entrepreneur and consumer are anonymous. Assets are exogenously collateralised and are seized together with future output in case of default. Default is thus endogenous as output determines the deliveries from the assets issued. In turn, the receipts from each asset purchased are assumed to depend on a fraction of the firm’s output. This fraction is anonymous and is treated as given by individuals who will anticipate it, in equilibrium, as a proportion of aggregate output, generating counter-cyclical default. We show that, in this context, the financial policies of the firm are, in general, not irrelevant. We establish the existence of equilibria and discuss the nature of the inefficiencies introduced by the presence of bankruptcy. Keywords: General equilibrium; Incomplete markets; Default; Production economy (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:matsoc:v:112:y:2021:i:c:p:109-119 DOI: 10.1016/j.mathsocsci.2021.03.010 Access Statistics for this article Mathematical Social Sciences is currently edited by J.-F. Laslier More articles in Mathematical Social Sciences from Elsevier |
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