Savings and default

Udara Peiris and Alexandros Vardoulakis ()

Economic Theory, 2013, vol. 54, issue 1, 153-180

Abstract: In the presence of uninsurable idiosyncratic risk, the optimal credit contract allows for the possibility of default. In addition, the optimal contract incorporates a precautionary savings motive over and above what agents would otherwise save. When default is sufficiently high, credit markets may collapse. A regulatory requirement on the level of savings can increase risk sharing and improve welfare by increasing the gains to trade in credit exchange. Under the appropriate verifiability condition on the level of savings, an appropriate market structure, agents voluntarily increase their level of storage such that trade and welfare improve. Copyright Springer-Verlag Berlin Heidelberg 2013

Keywords: Uninsurable risk; Credit; Default; Endogenous contracts; Precautionary savings; D52; D53; E21 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://hdl.handle.net/10.1007/s00199-012-0722-2 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:joecth:v:54:y:2013:i:1:p:153-180

Ordering information: This journal article can be ordered from
http://www.springer. ... eory/journal/199/PS2

DOI: 10.1007/s00199-012-0722-2

Access Statistics for this article

Economic Theory is currently edited by Nichoals Yanneils

More articles in Economic Theory from Springer, Society for the Advancement of Economic Theory (SAET) Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().