Abstract

http://ssrn.com/abstract=1955941
 
 

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Savings and Default


Udara Peiris


University of Warwick - Department of Economics; National Research University Higher School of Economics

Alexandros Vardoulakis


Board of Governors of the Federal Reserve System (FRB)

September 7, 2011


Abstract:     
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

working papers series





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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)
University of Warwick - Department of Economics ( email )
Coventry CV4 7AL
United Kingdom
National Research University Higher School of Economics
Myasnitskaya street, 20
Moscow, Moscow 119017
Russia
Alexandros Vardoulakis
Board of Governors of the Federal Reserve System (FRB) ( email )
20th Street and Constitution Avenue NW
Washington, DC 20551
United States
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