IDEAS home Printed from https://ideas.repec.org/a/eee/matsoc/v112y2021icp109-119.html
   My bibliography  Save this article

Production, bankruptcy, and financial policies under collateral constraints

Author

Listed:
  • León-Ledesma, Miguel
  • Orrillo, Jaime

Abstract

We propose an extension of the incomplete markets general equilibrium model with production to situations in which firms can default (bankruptcy). In the model, firms are owned by a single individual whose roles as entrepreneur and consumer are anonymous. Assets are exogenously collateralised and are seized together with future output in case of default. Default is thus endogenous as output determines the deliveries from the assets issued. In turn, the receipts from each asset purchased are assumed to depend on a fraction of the firm’s output. This fraction is anonymous and is treated as given by individuals who will anticipate it, in equilibrium, as a proportion of aggregate output, generating counter-cyclical default. We show that, in this context, the financial policies of the firm are, in general, not irrelevant. We establish the existence of equilibria and discuss the nature of the inefficiencies introduced by the presence of bankruptcy.

Suggested Citation

  • León-Ledesma, Miguel & Orrillo, Jaime, 2021. "Production, bankruptcy, and financial policies under collateral constraints," Mathematical Social Sciences, Elsevier, vol. 112(C), pages 109-119.
    • Handle: RePEc:eee:matsoc:v:112:y:2021:i:c:p:109-119
    DOI: 10.1016/j.mathsocsci.2021.03.010
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165489621000305
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.mathsocsci.2021.03.010?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Aloisio Araújo & Jaime Orrillo & Mario R. Páscoa, 2000. "Equilibrium with Default and Endogenous Collateral," Mathematical Finance, Wiley Blackwell, vol. 10(1), pages 1-21, January.
    2. Julio Dávila & Jay H. Hong & Per Krusell & José‐Víctor Ríos‐Rull, 2012. "Constrained Efficiency in the Neoclassical Growth Model With Uninsurable Idiosyncratic Shocks," Econometrica, Econometric Society, vol. 80(6), pages 2431-2467, November.
    3. Piero Gottardi & Felix Kubler, 2015. "Dynamic Competitive Economies with Complete Markets and Collateral Constraints," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 82(3), pages 1119-1153.
    4. John Geanakoplos & William Zame, 2014. "Collateral equilibrium, I: a basic framework," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 56(3), pages 443-492, August.
    5. Stijn Claessens & M. Ayhan Kose, 2017. "Macroeconomic Implications of Financial Imperfections: A Survey," Koç University-TUSIAD Economic Research Forum Working Papers 1719, Koc University-TUSIAD Economic Research Forum.
    6. A. Araujo & M. R. Páscoa & P. K. Monteiro, 1997. "Incomplete markets, continuum of states and default," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(1), pages 205-213.
    7. Markus K. Brunnermeier & Thomas M. Eisenbach & Yuliy Sannikov, 2012. "Macroeconomics with Financial Frictions: A Survey," Levine's Working Paper Archive 786969000000000384, David K. Levine.
    8. Jacques Drèze & Enrico Minelli & Mario Tirelli, 2008. "Production and financial policies under asymmetric information," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 35(2), pages 217-231, May.
    9. Joao F. Gomes & Amir Yaron & Lu Zhang, 2003. "Asset Prices and Business Cycles with Costly External Finance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 767-788, October.
    10. Vincenzo Quadrini, 2011. "Financial frictions in macroeconomic fluctations," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 97(3Q), pages 209-254.
    11. R. H. Coase, 2013. "The Problem of Social Cost," Journal of Law and Economics, University of Chicago Press, vol. 56(4), pages 837-877.
    12. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    13. Hellwig, Martin F, 1981. "Bankruptcy, Limited Liability, and the Modigliani-Miller Theorem," American Economic Review, American Economic Association, vol. 71(1), pages 155-170, March.
    14. repec:fip:fedreq:y:2011:i:3q:p:209-254:n:vol.97no.3 is not listed on IDEAS
    15. Steinert, Mariano & Torres-Martinez, Juan Pablo, 2007. "General equilibrium in CLO markets," Journal of Mathematical Economics, Elsevier, vol. 43(6), pages 709-734, August.
    16. Gersbach, Hans & Haller, Hans & Müller, Jürg, 2015. "The macroeconomics of Modigliani–Miller," Journal of Economic Theory, Elsevier, vol. 157(C), pages 1081-1113.
    17. Pradeep Dubey & John Geanakoplos & Martin Shubik, 2005. "Default and Punishment in General Equilibrium," Econometrica, Econometric Society, vol. 73(1), pages 1-37, January.
    18. Carvajal, Andrés & Polemarchakis, Herakles, 2011. "Idiosyncratic risk and financial policy," Journal of Economic Theory, Elsevier, vol. 146(4), pages 1569-1597, July.
    19. Araujo, Aloisio & Fajardo, Jose & Pascoa, Mario R., 2005. "Endogenous collateral," Journal of Mathematical Economics, Elsevier, vol. 41(4-5), pages 439-462, August.
    20. Guido Ruta & Piero Gottardi, 2009. "Equilibrium corporate finance," 2009 Meeting Papers 149, Society for Economic Dynamics.
    21. Miguel Leon-Ledesma & Jaime Orrillo, 2016. "Production and Endogenous Bankruptcy under Collateral Constraints," Studies in Economics 1610, School of Economics, University of Kent.
    22. Magill, Michael & Quinzii, Martine, 2015. "Prices and investment with collateral and default," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 111-132.
    23. DeMarzo, Peter M., 1988. "An extension of the Modigliani-Miller theorem to stochastic economies with incomplete markets and interdependent securities," Journal of Economic Theory, Elsevier, vol. 45(2), pages 353-369, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Boucekkine, Raouf & Seegmuller, Thomas & Venditti, Alain, 2021. "Advances in growth and macroeconomic dynamics: In memory of Carine Nourry," Mathematical Social Sciences, Elsevier, vol. 112(C), pages 1-6.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Miguel Leon-Ledesma & Jaime Orrillo, 2016. "Production and Endogenous Bankruptcy under Collateral Constraints," Studies in Economics 1610, School of Economics, University of Kent.
    2. Rubén Poblete-Cazenave & Juan Torres-Martínez, 2013. "Equilibrium with limited-recourse collateralized loans," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 53(1), pages 181-211, May.
    3. John Geanakoplos & William Zame, 2014. "Collateral equilibrium, I: a basic framework," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 56(3), pages 443-492, August.
    4. Cuong Le Van & Ngoc-Sang Pham, 2016. "Intertemporal equilibrium with financial asset and physical capital," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 62(1), pages 155-199, June.
    5. Piero Gottardi & Vincent Maurin & Cyril Monnet, 2019. "A theory of repurchase agreements, collateral re-use, and repo intermediation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 30-56, July.
    6. Piero Gottardi & Vincent Maurin & Cyril Monnet, 2019. "A theory of repurchase agreements, collateral re-use, and repo intermediation," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 30-56, July.
    7. Ngoc-Sang Pham, 2023. "Some Lectures on Macroeconomics," Working Papers hal-04366349, HAL.
    8. Nuno Gouveia, 2004. "General equilibrium with asymmetric information and default penalties," Cahiers de la Maison des Sciences Economiques b05051, Université Panthéon-Sorbonne (Paris 1), revised Jan 2005.
    9. Carvalho, Jaimilton & Orrillo, Jaime & da Silva, Fernanda Rocha Gomes, 2020. "Probability of default in collateralized credit operations for small business," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    10. Nuno Gouveia, 2005. "General equilibrium with asymmetric information and default penalties," Post-Print halshs-00195526, HAL.
    11. Iraola, Miguel A. & Torres-Martínez, Juan Pablo, 2014. "Equilibrium in collateralized asset markets: Credit contractions and negative equity loans," Journal of Mathematical Economics, Elsevier, vol. 55(C), pages 113-122.
    12. Jürgen Eichberger & Klaus Rheinberger & Martin Summer, 2014. "Credit risk in general equilibrium," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(2), pages 407-435, October.
    13. Phelan, Gregory & Toda, Alexis Akira, 2019. "Securitized markets, international capital flows, and global welfare," Journal of Financial Economics, Elsevier, vol. 131(3), pages 571-592.
    14. Ai, Hengjie & Li, Kai & Yang, Fang, 2020. "Financial intermediation and capital reallocation," Journal of Financial Economics, Elsevier, vol. 138(3), pages 663-686.
    15. Kirchner Philipp, 2020. "On Shadow Banking and Financial Frictions in DSGE Modeling," Review of Economics, De Gruyter, vol. 71(2), pages 101-133, August.
    16. Magill, Michael & Quinzii, Martine, 2015. "Prices and investment with collateral and default," Journal of Economic Dynamics and Control, Elsevier, vol. 51(C), pages 111-132.
    17. Orrilo, Jaime, 2006. "Another Proof of the Existence of GEI Equilibrium with Default and Exogenous Collateral," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 26(1), May.
    18. repec:fgv:epgrbe:v:67:n:3:a:3 is not listed on IDEAS
    19. Juan Francisco Martínez S. & Dimitrios P. Tsomocos, 2019. "Liquidity and default in an exchange economy," Chapters, in: Financial Regulation and Stability, chapter 7, pages 201-223, Edward Elgar Publishing.
    20. Tomas Adam & Miroslav Plasil, 2014. "The Impact of Financial Variables on Czech Macroeconomic Developments: An Empirical Investigation," Working Papers 2014/11, Czech National Bank.
    21. Stijn Claessens & M Ayhan Kose, 2018. "Frontiers of macrofinancial linkages," BIS Papers, Bank for International Settlements, number 95.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:matsoc:v:112:y:2021:i:c:p:109-119. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505565 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.