Pecuniary Externalities in Competitive Economies with Limited Pledgeability
Résumé
We analyze the efficiency properties of competitive economies with strategic default and limited pledgeability. We show that laissez-faire equilibria can be constrained suboptimal. Under certain conditions, imposing tighter borrowing constraints (relative to the laissez-faire regime) can make everybody in the economy better off. The inefficiency is due to the interaction between debt pricing and the default option, which generates a pecuniary externality. We also show that a Pigouvian subsidy on net financial positions may induce borrowers to internalize this externality and increase welfare.
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limited-pledgeability-online-appendix-2022-09-10 (1).pdf (830.22 Ko)
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limited-pledgeability-online-appendix-2022-09-10.pdf (830.22 Ko)
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