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Performance of an economy with credit constraints, bankruptcy and labor inflexibility

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Felipe Balmaceda
Ronald Fischer ()

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Abstract

We present a static general equilibrium model of an economy with agents with heterogenous wealth and endogenous credit constraints due to moral hazard. Credit constraints give rise to inefficiencies which are larger if wealth is distributed more unequally. We show that increases in the loan recovery rate improve the efficiency of the economy and raise the equilibrium interest rate. We also determine the sensitivity of the economy to the wealth distribution, and how this response depends on the loan recovery rate. We examine these results in an open economy, where interest rate increases are translated into inflows of capital due to improvements in loan recovery. The previous results are compounded if the economy faces labor inflexibilities, so smaller increases in inequality lead to productive inefficiencies and to lower wages. We simulate our model economy to determine the importance of these effects.

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Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 222.

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Date of creation: 2006
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Handle: RePEc:edj:ceauch:222

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  1. Oliver Hart, 2000. "Different Approaches to Bankruptcy," Harvard Institute of Economic Research Working Papers 1903, Harvard - Institute of Economic Research. [Downloadable!]
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  2. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. Philippe Aghion & Oliver Hart & John Moore, 1992. "The Economics of Bankruptcy Reform," CEP Discussion Papers dp0093, Centre for Economic Performance, LSE.
  4. Aghion, Philippe & Bolton, Patrick, 1997. "A Theory of Trickle-Down Growth and Development," Review of Economic Studies, Blackwell Publishing, vol. 64(2), pages 151-72, April. [Downloadable!] (restricted)
  5. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Oliver Hart & Rafael La Porta Drago & Florencio Lopez-de-Silane & John Moore, 1997. "A New Bankruptcy Procedure that Uses Multiple Auctions," NBER Working Papers 6278, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  7. Love, Inessa & Preve, Lorenzo A. & Sarria-Allende, Virginia, 2005. "Trade credit and bank credit : evidence from recent financial crises," Policy Research Working Paper Series 3716, The World Bank. [Downloadable!]
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  8. Kiyotaki, Nobuhiro & Moore, John, 1997. "Credit Cycles," Journal of Political Economy, University of Chicago Press, vol. 105(2), pages 211-48, April.
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  9. Tirole, Jean, 2001. "Corporate Governance," Econometrica, Econometric Society, vol. 69(1), pages 1-35, January.
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  10. Aghion, Philippe & Hart, Oliver & Moore, John, 1992. "The Economics of Bankruptcy Reform," Journal of Law, Economics and Organization, Oxford University Press, vol. 8(3), pages 523-46, October.
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  11. Arturo Galindo & Alejandro Micco, 2004. "Creditor protection and financial markets: empirical evidence and implications for Latin America," Economic Review, Federal Reserve Bank of Atlanta, issue Q 2, pages 29 - 37. [Downloadable!]
  12. Aghion, Philippe & Bacchetta, Philippe & Banerjee, Abhijit, 2004. "Financial development and the instability of open economies," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1077-1106, September. [Downloadable!] (restricted)
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