Endogenous credit limits with small default costs

Costas Azariadis and Leo Kaas

No 2012-048, Working Papers from Federal Reserve Bank of St. Louis

Abstract: We analyze an exchange economy of unsecured credit where borrowers have the option to declare bankruptcy in which case they are temporarily excluded from financial markets. Endogenous credit limits are imposed that are just tight enough to prevent default. Economies with temporary exclusion differ from their permanent exclusion counterparts in two important properties. If households are extremely patient, then the first?best allocation is an equilibrium in the latter economies but not necessarily in the former. In addition, temporary exclusion permits multiple stationary equilibria, with both complete and with incomplete consumption smoothing.

Keywords: Bankruptcy; Credit (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ban and nep-dge
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Citations: View citations in EconPapers (5)

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Journal Article: Endogenous credit limits with small default costs (2013)
Working Paper: Endogenous Credit Limits with Small Default Costs (2012)
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