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Default and Credit Constraint in General equilibrium

Xavier Ragot () and François Le Grand
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François Le Grand: EM Lyon

No 1165, 2011 Meeting Papers from Society for Economic Dynamics

Abstract: We study an economy where infinitely living agents face uninsurable shocks and are allowed default on their debt. After having defaulted, agents are excluded from the economy. We present a equilibrium definition allowing for both credit constraints and default inequilibrium. Indeed, existing theories introduce either default of credit constraint in general equilibrium, but never both. We prove that the optimal allocation includes both credit constraints and default, while the market allocation is associated with too much credit and too many default in equilibrium.

Date: 2011
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