U.S. inequality: Debt constraints or incomplete asset markets?

Córdoba, Juan-Carlos

doi:10.1016/j.jmoneco.2007.11.007

Cited by 17 publications

(11 citation statements)

References 21 publications

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“…Also, they do not examine how the allocation can be decentralized in asset markets with collateral constraints, nor they discuss the constrained inefficiency of competitive equilibria. Cordoba (2008) considers an economy with production, no aggregate uncertainty, and a continuum of ex ante identical agents and derives sufficient conditions for Pareto-efficiency that are similar to ours. Lorenzoni (2008), Kilenthong and Townsend (2011), and Gromb and Vayanos (2002) also show that collateral constraints can lead to constrained inefficient equilibrium allocations.…”

Section: Introductionmentioning

confidence: 86%

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Dynamic Competitive Economies with Complete Markets and Collateral Constraints

Gottardi

Kübler

2015

Review of Economic Studies

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In this article we examine the competitive equilibria of a dynamic stochastic economy with complete markets and collateral constraints. We show that, provided the sets of asset pay-offs and of collateral levels are sufficiently rich, the equilibrium allocations with sequential trades and collateral constraints are equivalent to those obtained in Arrow-Debreu markets subject to a series of limited pledgeability constraints. We provide both necessary and sufficient conditions for equilibria to be Pareto efficient and show that when collateral is scarce equilibria are not only Pareto inefficient but also often constrained inefficient, in the sense that imposing tighter borrowing restrictions can make everybody in the economy better off. We derive sufficient conditions for the existence of Markov equilibria and, for the case of two agents, for the existence of equilibria that have finite support. These equilibria can be computed with arbitrary accuracy and the model is very tractable. Abstract In this paper we examine the competitive equilibria of a dynamic stochastic economy with complete markets and collateral constraints. We show that, provided the sets of asset payoffs and of collateral levels are sufficiently rich, the equilibrium allocations with sequential trades and collateral constraints are equivalent to those obtained in Arrow-Debreu markets subject to a series of limited pledgeability constraints.We provide both necessary and sufficient conditions for equilibria to be Pareto efficient and show that when collateral is scarce equilibria are not only Pareto inefficient but also often constrained inefficient, in the sense that imposing tighter borrowing restrictions can make everybody in the economy better off.We derive sufficient conditions for the existence of Markov equilibria and, for the case of two agents, for the existence of equilibria that have finite support. These equilibria can be computed with arbitrary accuracy and the model is very tractable. * We thank seminar participants at various universities and conferences and in particular Arpad Abraham,

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Section: Introductionmentioning

confidence: 86%

“…When there is no aggregate uncertainty -that is to say h∈H ω h (s) is equal to a constant ω for all shock realizations s ∈ S, and agents' Bernoulli functions are state independent, all Pareto-efficient allocations must satisfy c h (s) = c h for all s, h. Hence condition (8) simplifies to…”

Section: No Aggregate Uncertaintymentioning

confidence: 99%

Dynamic Competitive Economies with Complete Markets and Collateral Constraints

Gottardi

Kübler

2015

Review of Economic Studies

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“…19 See Cordoba (2008) and Broer (2011) for further analysis of the evidence. 20 Therefore, if default happens in this case, it will be at a rate of 100 per cent.…”

Section: Consumption Inequality: Default Pricing or Debt Constraintsmentioning

confidence: 99%

Consumer default with complete markets: default-based pricing and finite punishment

Mateos‐Planas

Seccia

2013

Econ Theory

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This paper studies economies with complete markets where there is positive default on consumer debt. In a simple tractable two-period model, households can default partially, at a finite punishment cost, and competitive intermediaries price loans of different sizes separately. This environment yields only partial insurance. The default-based pricing of debt makes it too costly for the borrower to achieve full insurance and there is too little trade in securities. This framework is in contrast with existing literature. Unlike the literature with default, there are no restrictions on the set of state contingent securities that are issued. Unlike the literature on lack of commitment, limited trade arises without need of debt constraints that rule default out. Compared with the latter, the present approach appears to imply more consumption inequality. An extended model with an infinite horizon, idiosyncratic risk and more realistic assumptions is used to demonstrate the general validity of this approach and its main implications.

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“…In contrast, previous work on consumption insurance in limited enforcement models did not consider life-cycle variations in earnings and human capital investment decisions. As a consequence, in these models there is little reason for households to borrow, and a common finding of the previous literature has been that consumption insurance is almost perfect in calibrated models with physical capital (Cordoba, 2008, andPerri, 2006). 2 Finally, we share with Andolfatto and Gervais (2006) and Lochner and Monge (2011) the focus on human capital accumulation and endogenous borrowing constraints due to enforcement problems, but we go beyond their work by studying the interaction between borrowing constraints and insurance.…”

Section: Introductionmentioning

confidence: 99%

Insurance in Human Capital Models with Limited Enforcement

2016

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Institute for the Study of Labor (IZA) in Bonn is a local and virtual international research center and a place of communication between science, politics and business. IZA is an independent nonprofit organization supported by Deutsche Post Foundation. The center is associated with the University of Bonn and offers a stimulating research environment through its international network, workshops and conferences, data service, project support, research visits and doctoral program. IZA engages in (i) original and internationally competitive research in all fields of labor economics, (ii) development of policy concepts, and (iii) dissemination of research results and concepts to the interested public. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E S Insurance in Human CapitalIZA Discussion Papers often represent preliminary work and are circulated to encourage discussion. Citation of such a paper should account for its provisional character. A revised version may be available directly from the author. The model economy is populated by a large number of long-lived, risk-averse households with homothetic preferences who can invest in risk-free physical capital and risky human capital. Households have access to a complete set of credit and insurance contracts, but their ability to use the available financial instruments is limited by the possibility of default (limited contract enforcement). We provide a convenient equilibrium characterization that facilitates the computation of recursive equilibria substantially. We use a calibrated version of the model with stochastically aging households divided into 9 age groups. Younger households have higher expected human capital returns than older households. According to the baseline calibration, for young households less than half of human capital risk is insured and the welfare losses due to the lack of insurance range from 3 percent of lifetime consumption (age 40) to 7 percent of lifetime consumption (age 23). Realistic variations in the model parameters have non-negligible effects on equilibrium insurance and welfare, but the result that young households are severely underinsured is robust to such variations.JEL Classification: E21, E24, D52, J24

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U.S. inequality: Debt constraints or incomplete asset markets?

Cited by 17 publications

References 21 publications

Dynamic Competitive Economies with Complete Markets and Collateral Constraints

Dynamic Competitive Economies with Complete Markets and Collateral Constraints

Consumer default with complete markets: default-based pricing and finite punishment

Insurance in Human Capital Models with Limited Enforcement

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