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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)

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.

Suggested Citation

  • Tao Zha, 2001. "Bankruptcy Law, Capital Allocation, and Aggregate Effects: A Dynamic Heterogenous Agent Model with Incomplete Markets," Annals of Economics and Finance, Society for AEF, vol. 2(2), pages 379-400, November.
  • Handle: RePEc:cuf:journl:y:2001:v:2:i:2:p:379-400
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    References listed on IDEAS

    as
    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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    Citations

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    Cited by:

    1. Athreya, Kartik B. & Simpson, Nicole B., 2006. "Unsecured debt with public insurance: From bad to worse," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 797-825, May.
    2. Irwin, Gregor & Thwaites, Gregory, 2008. "Efficient frameworks for sovereign borrowing," Bank of England working papers 343, Bank of England.
    3. Igor Livshits, 2015. "Recent Developments In Consumer Credit And Default Literature," Journal of Economic Surveys, Wiley Blackwell, vol. 29(4), pages 594-613, September.
    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.
    5. Sims, Christopher A. & Zha, Tao, 2006. "Does Monetary Policy Generate Recessions?," Macroeconomic Dynamics, Cambridge University Press, vol. 10(02), pages 231-272, April.
    6. Athreya, Kartik B., 2014. "Big Ideas in Macroeconomics: A Nontechnical View," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262019736, January.
    7. Kartik Athreya & Ahmet Akyol, 2007. "Unsecured Credit and Self-Employment," 2007 Meeting Papers 49, Society for Economic Dynamics.

    More about this item

    Keywords

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

    JEL classification:

    • E69 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Other
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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