Sustainable debt

Gaetano Bloise (), Herakles Polemarchakis () and Yiannis Vailakis ()
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Gaetano Bloise: Department of Economics, Yeshiva University and University of Rome III
Herakles Polemarchakis: Department of Economics, University of Warwick
Yiannis Vailakis: Adam Smith Business School, University of Glasgow

Theoretical Economics, 2021, vol. 16, issue 4

Abstract: We show that debt is sustainable at a competitive equilibrium based solely on the reputation for repayment; that is, even without collateral or legal sanctions available to creditors. In an incomplete asset market, when the rate of interest falls recurrently below the rate of growth of the economy, self-insurance is more costly than borrowing, and repayments on loans are enforced by the implicit threat of loss of the risk-sharing advantages of debt contracts. Private debt credibly circulates as a form of inside money, and it is not valued as a speculative bubble. Competitive equilibria with self-enforcing debt exist under a suitable hypothesis of gains from trade.

Keywords: Rate of interest; self-enforcing debt; Ponzi games; incomplete markets; competitive equilibrium; gains from trade (search for similar items in EconPapers)
JEL-codes: D52 F34 H63 (search for similar items in EconPapers)
Date: 2021-11-08
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