Borrowing Constraint as an Optimal Contract
AbstractWe study a continuous-time version of the optimal risk-sharing problem with one-sided commitment. In the optimal contract, the agent's consumption is non-decreasing and depends only on the maximal level of the agent's income realized to date. In the complete-markets implementation of the optimal contract, the Alvarez-Jermann solvency constraints take the form of a simple borrowing constraint familiar from the Bewley-Aiyagari incomplete-markets models. Unlike in the incomplete-markets models, however, the asset buffer stock held by the agent is negatively correlated with income.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 23216.
Date of creation: 2009
Date of revision:
Borrowing constraint; limited commitment;
Find related papers by JEL classification:
- D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Biais, Bruno & Mariotti, Thomas & Plantin, Guillaume & Rochet, Jean-Charles, 2004.
"Dynamic Security Design: Convergence to Continuous Time and Asset Pricing Implications,"
IDEI Working Papers
312, Institut d'Économie Industrielle (IDEI), Toulouse, revised Sep 2006.
- Bruno Biais & Thomas Mariotti & Guillaume Plantin & Jean-Charles Rochet, 2007. "Dynamic Security Design: Convergence to Continuous Time and Asset Pricing Implications," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 345-390.
- Milton Harris & Bengt Holmstrom, 1981.
"A Theory of Wage Dynamics,"
488, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- Yuliy Sannikov, 2008. "A Continuous-Time Version of the Principal-Agent Problem," Review of Economic Studies, Oxford University Press, vol. 75(3), pages 957-984.
- Rui Albuquerque & Hugo Hopenhayn, 2002.
"Optimal Lending Contracts and Firm Dynamics,"
RCER Working Papers
493, University of Rochester - Center for Economic Research (RCER).
- Dirk Krueger & Harald Uhlig, 2005.
"Competitive Risk Sharing Contracts with One-Sided Commitment,"
SFB 649 Discussion Papers
SFB649DP2005-003, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Krueger, Dirk & Uhlig, Harald, 2006. "Competitive risk sharing contracts with one-sided commitment," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1661-1691, October.
- Krueger, Dirk & Uhlig, Harald, 2005. "Competitive risk sharing contracts with one-sided commitment," CFS Working Paper Series 2005/07, Center for Financial Studies (CFS).
- Krüger, Dirk & Uhlig, Harald, 2004. "Competitive Risk Sharing Contracts with One-Sided Commitment," CEPR Discussion Papers 4208, C.E.P.R. Discussion Papers.
- Dirk Krueger & Harald Uhlig, 2003. "Competitive Risk Sharing Contracts with One-Sided Commitment," Levine's Bibliography 666156000000000407, UCLA Department of Economics.
- Dirk Krueger & Harald Uhlig, 2003. "Competitive Risk Sharing Contracts with One-Sided Commitment," NBER Working Papers 10135, National Bureau of Economic Research, Inc.
- Zhiguo He, 2009. "Optimal Executive Compensation when Firm Size Follows Geometric Brownian Motion," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 859-892, February.
- Stefania Albanesi & Christopher Sleet, 2004.
"Dynamic optimal taxation with private information,"
Discussion Paper / Institute for Empirical Macroeconomics
140, Federal Reserve Bank of Minneapolis.
- Timothy J. Kehoe & David K. Levine, 1992.
"Debt constrained asset markets,"
445, Federal Reserve Bank of Minneapolis.
- Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
- Thomas, Jonathan & Worrall, Tim, 1988. "Self-enforcing Wage Contracts," Review of Economic Studies, Wiley Blackwell, vol. 55(4), pages 541-54, October.
- Tomasz Piskorski & Alexei Tchistyi, 2010. "Optimal Mortgage Design," Review of Financial Studies, Society for Financial Studies, vol. 23(8), pages 3098-3140, August.
- Zhang, Yuzhe, 2009.
"Dynamic contracting with persistent shocks,"
Journal of Economic Theory,
Elsevier, vol. 144(2), pages 635-675, March.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Ekkehart Schlicht).
If references are entirely missing, you can add them using this form.