Herakles Polemarchakis and
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Gaetano Bloise: Yeshiva University
Herakles Polemarchakis: University of Warwick
Yiannis Vailakis: University of Glasgow
CRETA Online Discussion Paper Series from Centre for Research in Economic Theory and its Applications CRETA
Debt is sustainable at a competitive equilibrium due solely to the reputation of debtors for repayment; that is, even absent collateral or legal sanctions available to creditors. Under incomplete markets, when the rate of interest (net of growth) is recurrently negative, self-insurance is more costly than borrowing, and repayments on loans are enforced by he implicit threat of loss of risk-sharing advantages of debt contracts. Private debt credibly circulates as a form of inside money and, in general, is not valued as a speculative bubble; it is distinct from outside money. Competitive equilibria with self-enforcing debt exist under a suitable hypothesis of gains from trade.
Keywords: Rate of interest; self-enforcing debt; reputational debt; incomplete markets; competitive equilibrium (search for similar items in EconPapers)
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