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Endogenous trading constraints with incomplete asset markets

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  • Ábrahám, Árpád
  • Cárceles-Poveda, Eva

Abstract

This paper endogenizes the borrowing constraints on capital in a production economy with incomplete markets. We find that these limits get looser with income, a property that is consistent with US data on credit limits. The framework with endogenous limits is then used to study the effects of a revenue neutral tax reform that eliminates capital income taxes. Our results illustrate that it is very important to take into account the effects of tax policies on the limits. Throughout the transition, these effects can be big enough to change the overall conclusion about the desirability of a tax reform.

Suggested Citation

  • Ábrahám, Árpád & Cárceles-Poveda, Eva, 2010. "Endogenous trading constraints with incomplete asset markets," Journal of Economic Theory, Elsevier, vol. 145(3), pages 974-1004, May.
  • Handle: RePEc:eee:jetheo:v:145:y:2010:i:3:p:974-1004
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    Cited by:

    1. Castro, Rui & Koumtingué, Nelnan, 2014. "On the individual optimality of economic integration," Journal of Monetary Economics, Elsevier, vol. 68(C), pages 115-135.
    2. Juan M. Sanchez, 2009. "The role of information in the rise in consumer bankruptcies," Working Paper 09-04, Federal Reserve Bank of Richmond.
    3. Yili Chien & Junsang Lee, 2006. "Why Tax Capital?," 2006 Meeting Papers 492, Society for Economic Dynamics.
    4. Anagnostopoulos, Alexis & Cárceles-Poveda, Eva & Lin, Danmo, 2012. "Dividend and capital gains taxation under incomplete markets," Journal of Monetary Economics, Elsevier, vol. 59(7), pages 599-611.
    5. Alexis Anagnostopoulos & Eva Carceles-Poveda & Yair Tauman, 2016. "Value Preserving Welfare Weights for Social Optimization Problems," Department of Economics Working Papers 16-06, Stony Brook University, Department of Economics.
    6. Krueger, Dirk & Perri, Fabrizio, 2011. "Public versus private risk sharing," Journal of Economic Theory, Elsevier, vol. 146(3), pages 920-956, May.
    7. Mateos-Planas, Xavier & Seccia, Giulio, 2006. "Welfare implications of endogenous credit limits with bankruptcy," Journal of Economic Dynamics and Control, Elsevier, vol. 30(11), pages 2081-2115, November.
    8. Nelnan Koumtingué & Rui Castro, 2009. "On the Optimality of Economic Integration," 2009 Meeting Papers 1043, Society for Economic Dynamics.
    9. Mateos-Planas, Xavier, 2013. "Credit limits and bankruptcy," Economics Letters, Elsevier, vol. 121(3), pages 469-472.
    10. Gaetano Bloise & Pietro Reichlin & Mario Tirelli, 2013. "Fragility of Competitive Equilibrium with Risk of Default," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(2), pages 271-295, April.
    11. Eva Carceles-Poveda & Arpad Abraham, 2005. "Complete Markets, Enforcement Constraints and Intermediation," 2005 Meeting Papers 661, Society for Economic Dynamics.
    12. Piero Gottardi & Atsushi Kajii & Tomoyuki Nakajima, 2010. "Optimal taxation and constrained inefficiency in an infinite-horizon economy with incomplete markets," KIER Working Papers 745, Kyoto University, Institute of Economic Research.
    13. Bejan, Camelia & Bidian, Florin, 2010. "Limited enforcement, bubbles and trading in incomplete markets," MPRA Paper 36819, University Library of Munich, Germany, revised 20 Feb 2012.
    14. Francesc Obiols-Homs, 2011. "On borrowing limits and welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 14(2), pages 279-294, April.
    15. Jenö Pál & John Stachurski, 2011. "Fitted Value Function Iteration With Probability One Contractions," ANU Working Papers in Economics and Econometrics 2011-560, Australian National University, College of Business and Economics, School of Economics.
    16. Tiago Berriel & Rodrigo Abreu, 2015. "Long Term Debt and Credit Crisis in a Liquidity Constrained Economy," Textos para discussão 644, Department of Economics PUC-Rio (Brazil).
    17. Victor Filipe Martins da Rocha & Yiannis Vailakis, 2014. "Self-enforcing Debt, Reputation, and the Role of Interest Rates," Working Papers hal-01097114, HAL.
    18. Juan M. Sanchez, 2008. "The Role of Information in Consumer Debt and Bankruptcy," 2008 Meeting Papers 523, Society for Economic Dynamics.
    19. Vogel, Edgar, 2014. "Optimal level of government debt - matching wealth inequality and the fiscal sector," Working Paper Series 1665, European Central Bank.
    20. Pál, Jenő & Stachurski, John, 2013. "Fitted value function iteration with probability one contractions," Journal of Economic Dynamics and Control, Elsevier, vol. 37(1), pages 251-264.
    21. Vogel, Edgar, 2014. "Optimal Level of Government Debt: Matching Wealth Inequality and the Fiscal Sector," MEA discussion paper series 201410, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
    22. Ramon Marimon & Eva Carceles-Poveda & Arpad Abraham, 2012. "On the optimal design of a Financial Stability Fund," 2012 Meeting Papers 945, Society for Economic Dynamics.
    23. Xavier Mateos-Planas & Giulio Seccia, 2013. "Consumer Default with Complete Markets: Default-based Pricing and Finite Punishment," Working Papers 711, Queen Mary University of London, School of Economics and Finance.
    24. repec:eee:dyncon:v:85:y:2017:i:c:p:90-122 is not listed on IDEAS
    25. Eva Carceles-Poveda, 2009. "Asset Prices and Business Cycles under Market Incompleteness," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(3), pages 405-422, July.

    More about this item

    Keywords

    Endogenous borrowing constraints Incomplete markets Production Tax reform;

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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