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Bankruptcy Law, Capital Allocation, and Aggregate Effects: A Dynamic Heterogenous Agent Model with Incomplete Markets

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  • Tao Zha

    (Research Department, Federal Reserve Bank of Atlanta)

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Abstract

Under the assumption that asset markets are incomplete, this paper introduces bankruptcy in an intertemporal heterogenous agent model with capital accumulation and heterogeneous agents. It explores the role of regulatory intervention and argues that intervention in the form of a level of bankruptcy exemption can enhance not only social welfare but also distributive equity. The bankruptcy law is carefully specified in the model. The model generates distributional changes in consumption, capital, and bankruptcy risk in response to an adjustment in the exemption level and accentuates the effects of these redistributions on aggregate variables.

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File URL: http://www.aeconf.net/Articles/Nov2001/aef020205.pdf
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Bibliographic Info

Article provided by Society for AEF in its journal Annals of Economics and Finance.

Volume (Year): 2 (2001)
Issue (Month): 2 (November)
Pages: 379-400

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Handle: RePEc:cuf:journl:y:2001:v:2:i:2:p:379-400

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Keywords: Bankruptcy law; Capital allocations; Heterogenous agent; Incomplete markets;

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  1. Dubey, Pradeep & Shubik, Martin, 1979. "Bankruptcy and optimality in a closed trading mass economy modelled as a non-cooperative game," Journal of Mathematical Economics, Elsevier, vol. 6(2), pages 115-134, July.
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Cited by:
  1. Kartik Athreya & Nicole B. Simpson, 2004. "Unsecured debt with public insurance : from bad to worse," Working Paper 03-14, Federal Reserve Bank of Richmond.
  2. Sims, Christopher A. & Zha, Tao, 2006. "Does Monetary Policy Generate Recessions?," Macroeconomic Dynamics, Cambridge University Press, vol. 10(02), pages 231-272, April.
  3. Irwin, Gregor & Thwaites, Gregory, 2008. "Efficient frameworks for sovereign borrowing," Bank of England working papers 343, Bank of England.
  4. Athreya, Kartik B., 2008. "Default, insurance, and debt over the life-cycle," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 752-774, May.

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