Bankruptcy and Collateral in Debt Constrained Markets

Timothy Kehoe and David Levine

No 12656, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Typical models of bankruptcy and collateral rely on incomplete asset markets. In fact, bankruptcy and collateral add contingencies to asset markets. In some models, these contingencies can be used by consumers to achieve the same equilibrium allocations as in models with complete markets. In particular, the equilibrium allocation in the debt constrained model of Kehoe and Levine (2001) can be implemented in a model with bankruptcy and collateral. The equilibrium allocation is constrained efficient. Bankruptcy occurs when consumers receive low income shocks. The implementation of the debt constrained allocation in a model with bankruptcy and collateral is fragile in the sense of Leijonhufvud's "corridor of stability," however: If the environment changes, the equilibrium allocation is no longer constrained efficient.

JEL-codes: D50 D52 D61 G13 (search for similar items in EconPapers)
Date: 2006-10
New Economics Papers: this item is included in nep-cfn and nep-dge
Note: EFG CF
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Citations: View citations in EconPapers (7)

Published as Farmer, Roger E. A. (ed.) Macroeconomics in the Small and the Large: Essays on Microfoundations, Macroeconomic Applications, and Economic History in Honor of Axel Leijonhufvud. Northampton, MA: Edward Elgar Publishing, 2008.

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Chapter: Bankruptcy and Collateral in Debt Constrained Markets (2008)
Working Paper: Bankruptcy and collateral in debt constrained markets (2006)
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