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Performance of an economy with credit constraints, bankruptcy and labor inflexibility

  • Felipe Balmaceda
  • Ronald Fischer

    ()

We present a static general equilibrium model of an economy with agents with heterogenous wealth and endogenous credit constraints due to moral hazard. Credit constraints give rise to inefficiencies which are larger if wealth is distributed more unequally. We show that increases in the loan recovery rate improve the efficiency of the economy and raise the equilibrium interest rate. We also determine the sensitivity of the economy to the wealth distribution, and how this response depends on the loan recovery rate. We examine these results in an open economy, where interest rate increases are translated into inflows of capital due to improvements in loan recovery. The previous results are compounded if the economy faces labor inflexibilities, so smaller increases in inequality lead to productive inefficiencies and to lower wages. We simulate our model economy to determine the importance of these effects.

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File URL: http://www.dii.uchile.cl/~cea/sitedev/cea/www/download.php?file=documentos_trabajo/ASOCFILE120060810123342.pdf
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Paper provided by Centro de Economía Aplicada, Universidad de Chile in its series Documentos de Trabajo with number 222.

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Date of creation: 2006
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Handle: RePEc:edj:ceauch:222
Contact details of provider: Web page: http://www.dii.uchile.cl/cea/

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  1. Oliver Hart, 2000. "Different Approaches to Bankruptcy," Harvard Institute of Economic Research Working Papers 1903, Harvard - Institute of Economic Research.
  2. Tirole, Jean, 2001. "Corporate Governance," Econometrica, Econometric Society, vol. 69(1), pages 1-35, January.
  3. Aghion, P. & Hart, O. & Moore, J., 1992. "The Economics of Bankruptcy Reform," Working papers 92-11, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996. "Law and Finance," NBER Working Papers 5661, National Bureau of Economic Research, Inc.
  5. Hart, Oliver & La Porta Drago, Rafael & Lopez-de-Silanes, Florencio & Moore, John, 1997. "A new bankruptcy procedure that uses multiple auctions," European Economic Review, Elsevier, vol. 41(3-5), pages 461-473, April.
  6. Love, Inessa & Preve, Lorenzo A. & Sarria-Allende, Virginia, 2007. "Trade credit and bank credit: Evidence from recent financial crises," Journal of Financial Economics, Elsevier, vol. 83(2), pages 453-469, February.
  7. Philippe Aghion & Philippe Bacchetta & Abhijit Banerjee, 2004. "Financial Development and the Instability of Open Economies," NBER Working Papers 10246, National Bureau of Economic Research, Inc.
  8. R. Glenn Hubbard, 1997. "Capital-Market Imperfections and Investment," NBER Working Papers 5996, National Bureau of Economic Research, Inc.
  9. Aghion, Philippe & Bolton, Patrick, 1997. "A Theory of Trickle-Down Growth and Development," Review of Economic Studies, Wiley Blackwell, vol. 64(2), pages 151-72, April.
  10. Arturo Galindo & Alejandro Micco, 2004. "Creditor protection and financial markets: empirical evidence and implications for Latin America," Economic Review, Federal Reserve Bank of Atlanta, issue Q 2, pages 29 - 37.
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