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Credit And Growth Under Limited Commitment

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  • AZARIADIS, COSTAS
  • KAAS, LEO

Abstract

We consider a linear growth model with idiosyncratic productivity shocks in which producers cannot commit to repay their loans. Borrowing constraints are determined endogenously by the borrowers' incentives to repay, assuming that defaulters lose a share of output and are excluded from future trade in the credit market. We characterize necessary and sufficient conditions for the enforceability of a first-best equilibrium growth path. Weak property rights, impatient producers, and small productivity differentials can make the efficient growth path nonenforceable and lead to an inefficient equilibrium with binding borrowing constraints. For some economies, multiple balanced growth paths coexist.

Suggested Citation

  • Azariadis, Costas & Kaas, Leo, 2008. "Credit And Growth Under Limited Commitment," Macroeconomic Dynamics, Cambridge University Press, vol. 12(S1), pages 20-30, April.
    • Handle: RePEc:cup:macdyn:v:12:y:2008:i:s1:p:20-30_07
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    Cited by:

    1. Ceyhun Elgin & Burak Uras, 2013. "Is informality a barrier to financial development?," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 4(3), pages 309-331, August.
    2. Uras, Burak R., 2016. "Long-Term Investment And Net-Worth Building With Limited Contract Enforcement," Macroeconomic Dynamics, Cambridge University Press, vol. 20(1), pages 276-312, January.
    3. Almuth Scholl, 2018. "Debt Relief for Poor Countries: Conditionality and Effectiveness," Economica, London School of Economics and Political Science, vol. 85(339), pages 626-648, July.

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