Debt Constrained Asset Markets

Timothy J. Kehoe, David K. Levine

Research output: Contribution to journalArticle

271 Citations (Scopus)

Abstract

We develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature. If an agent defaults on a contract, he can be excluded from future contingent claims markets trading and can have his assets seized. He cannot be excluded from spot markets trading, however, and he has some private endowments that cannot be seized. t\1l information is publicly held and common knowledge, and there is a complete set of contingent claims markets. Since there is complete information, an agent cannot enter into a contract in which he would have an incentive to default in some state. In general there is only partial insurance: variations in consumption may be imperfectly correlated across agents; interest rates may be lower than they would be without constraints; and equilibria may be Pareto ranked. © 1993 The Review of Economic Studies Limited.

Original languageEnglish
Pages (from-to)865-888
Number of pages24
JournalReview of Economic Studies
Volume60
Issue number4
DOIs
StatePublished - 1993

Fingerprint

Asset markets
Debt
Contingent claims
Insurance
Economics
Complete information
Interest rates
Spot market
Endowments
Pareto
Common knowledge
Dynamic consistency
Incentives
Individual rationality
Assets
General equilibrium

Cite this

Debt Constrained Asset Markets. / Kehoe, Timothy J.; Levine, David K.

In: Review of Economic Studies, Vol. 60, No. 4, 1993, p. 865-888.

Research output: Contribution to journalArticle

Kehoe, Timothy J. ; Levine, David K. / Debt Constrained Asset Markets. In: Review of Economic Studies. 1993 ; Vol. 60, No. 4. pp. 865-888.
@article{95281f7721f04ba3b509f8ab419fa650,
title = "Debt Constrained Asset Markets",
abstract = "We develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature. If an agent defaults on a contract, he can be excluded from future contingent claims markets trading and can have his assets seized. He cannot be excluded from spot markets trading, however, and he has some private endowments that cannot be seized. t\1l information is publicly held and common knowledge, and there is a complete set of contingent claims markets. Since there is complete information, an agent cannot enter into a contract in which he would have an incentive to default in some state. In general there is only partial insurance: variations in consumption may be imperfectly correlated across agents; interest rates may be lower than they would be without constraints; and equilibria may be Pareto ranked. {\circledC} 1993 The Review of Economic Studies Limited.",
author = "Kehoe, {Timothy J.} and Levine, {David K.}",
year = "1993",
doi = "10.2307/2298103",
language = "English",
volume = "60",
pages = "865--888",
journal = "Review of Economic Studies",
issn = "0034-6527",
publisher = "Oxford University Press",
number = "4",

}

TY - JOUR

T1 - Debt Constrained Asset Markets

AU - Kehoe, Timothy J.

AU - Levine, David K.

PY - 1993

Y1 - 1993

N2 - We develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature. If an agent defaults on a contract, he can be excluded from future contingent claims markets trading and can have his assets seized. He cannot be excluded from spot markets trading, however, and he has some private endowments that cannot be seized. t\1l information is publicly held and common knowledge, and there is a complete set of contingent claims markets. Since there is complete information, an agent cannot enter into a contract in which he would have an incentive to default in some state. In general there is only partial insurance: variations in consumption may be imperfectly correlated across agents; interest rates may be lower than they would be without constraints; and equilibria may be Pareto ranked. © 1993 The Review of Economic Studies Limited.

AB - We develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature. If an agent defaults on a contract, he can be excluded from future contingent claims markets trading and can have his assets seized. He cannot be excluded from spot markets trading, however, and he has some private endowments that cannot be seized. t\1l information is publicly held and common knowledge, and there is a complete set of contingent claims markets. Since there is complete information, an agent cannot enter into a contract in which he would have an incentive to default in some state. In general there is only partial insurance: variations in consumption may be imperfectly correlated across agents; interest rates may be lower than they would be without constraints; and equilibria may be Pareto ranked. © 1993 The Review of Economic Studies Limited.

UR - http://www.scopus.com/inward/record.url?scp=0000737515&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=0000737515&partnerID=8YFLogxK

U2 - 10.2307/2298103

DO - 10.2307/2298103

M3 - Article

VL - 60

SP - 865

EP - 888

JO - Review of Economic Studies

JF - Review of Economic Studies

SN - 0034-6527

IS - 4

ER -