Self-Enforcing Debt and Rational Bubbles

Victor Filipe Martins da Rocha () and Mateus Santos
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Victor Filipe Martins da Rocha: CEREMADE - CEntre de REcherches en MAthématiques de la DEcision - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique, EESP - Sao Paulo School of Economics - FGV - Fundacao Getulio Vargas [Rio de Janeiro]
Mateus Santos: Department of Economics, University of Minnesota - UMN - University of Minnesota [Twin Cities] - UMN - University of Minnesota System
Authors registered in the RePEc Author Service: V. Filipe Martins-da-Rocha

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Abstract: We analyze repayment incentives in an infinite horizon competitive economy where agents cannot commit to financial contracts. We follow Bulow and Rogoff (1989) by assuming that a defaulting agent is excluded from borrowing forever but keeps the ability to save. Hellwig and Lorenzoni (2009) proved that self-enforcing and not-too-tight debt limits can form a bubble (or discounted martingale) at equilibrium. They also show that when debt limits form a bubble, then the equilibrium outcomes (prices and consumption) are the same as in a model without private debt but with unbacked public debt. The contribution of this paper is to show that bubbles are the only debt limits that are self-enforcing and not too tight. Our characterization is obtained without imposing any ad-hoc boundedness assumption on the endogenous debt limits.

Date: 2019-09-30
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Citations: View citations in EconPapers (4)

Published in SSRN : Social Science Research Network, 2019, ⟨10.2139/ssrn.3169229⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01951504

DOI: 10.2139/ssrn.3169229

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