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http://ssrn.com/abstract=940605
 
 

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Bankruptcy and Collateral in Debt Constrained Markets


Timothy J. Kehoe


University of Minnesota - Twin Cities - Department of Economics; National Bureau of Economic Research (NBER)

David K. Levine


Washington University in Saint Louis - Department of Economics; European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS)

October 2006

NBER Working Paper No. w12656

Abstract:     
Typical models of bankruptcy and collateral rely on incomplete asset markets. In fact, bankruptcy and collateral add contingencies to asset markets. In some models, these contingencies can be used by consumers to achieve the same equilibrium allocations as in models with complete markets. In particular, the equilibrium allocation in the debt constrained model of Kehoe and Levine (2001) can be implemented in a model with bankruptcy and collateral. The equilibrium allocation is constrained efficient. Bankruptcy occurs when consumers receive low income shocks. The implementation of the debt constrained allocation in a model with bankruptcy and collateral is fragile in the sense of Leijonhufvud's "corridor of stability," however: If the environment changes, the equilibrium allocation is no longer constrained efficient.

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Date posted: November 20, 2006  

Suggested Citation

Kehoe, Timothy J. and Levine, David K., Bankruptcy and Collateral in Debt Constrained Markets (October 2006). NBER Working Paper No. w12656. Available at SSRN: http://ssrn.com/abstract=940605

Contact Information

Timothy J. Kehoe (Contact Author)
University of Minnesota - Twin Cities - Department of Economics ( email )
271 19th Avenue South
1169 Management & Economics
Minneapolis, MN 55455
United States
612-625-1589 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
David K. Levine
Washington University in Saint Louis - Department of Economics ( email )
One Brookings Drive
St. Louis, MO 63130
United States
HOME PAGE: http://www.dklevine.com
European University Institute - Robert Schuman Centre for Advanced Studies (RSCAS) ( email )
Via dei Roccettini 9
via delle Fontanelle 10
50016 San Domenico di Fiesole, Florence 50014
Italy
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