Optimal Exclusion

Cyril Monnet and Erwan Quintin ()

Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft

Abstract: In a canonical model of borrowing and lending, an exclusion technology that features full exclusion for a deterministic number of periods following default maximizes stationary equilibrium welfare. This exclusion policy maximizes the stationary volume of mutually beneficial lending transactions. It also maximizes the average welfare of the excluded. The optimal length of exclusion depends on fundamentals such as borrower patience and the direct cost of default. It also depends on incentives to default for strategic rather than exogenous reasons.

Keywords: endogenous default; exclusion (search for similar items in EconPapers)
JEL-codes: D52 D82 (search for similar items in EconPapers)
Date: 2018-06
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Working Paper: Optimal Exclusion (2018)
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