References (29)



Savings and Default

Udara Peiris

National Research University Higher School of Economics (Moscow)

Alexandros Vardoulakis

Board of Governors of the Federal Reserve System

September 7, 2011

In the presence of uninsurable idiosyncratic risk, the optimal credit contract allows for the possibility of default. In addition, the optimal contract incorporates a precautionary savings motive over and above what agents would otherwise save. When default is sufficiently high, credit markets may collapse. A regulatory requirement on the level of savings can increase risk-sharing and improve welfare by increasing the gains to trade in credit exchange. Under the appropriate verifiability condition on the level of savings, an appropriate market structure, agents voluntarily increase their level of storage such that trade and welfare improve.

Number of Pages in PDF File: 50

Keywords: Uninsurable Risk, Credit, Default, Endogenous Contracts, Precautionary Savings

JEL Classification: D52, D53, E21

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Date posted: November 7, 2011  

Suggested Citation

Peiris, Udara and Vardoulakis, Alexandros, Savings and Default (September 7, 2011). Available at SSRN: http://ssrn.com/abstract=1955941 or http://dx.doi.org/10.2139/ssrn.1955941

Contact Information

Udara Peiris (Contact Author)
National Research University Higher School of Economics (Moscow)
Myasnitskaya street 20
Moscow, Moscow 119017

Alexandros Vardoulakis
Board of Governors of the Federal Reserve System ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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