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Author:Bolton, P.
Rosenthal, H.
Title:Political intervention in debt contracts
Journal:Journal of Political Economy
2002 : OCT, VOL. 110:5, p. 1103-1134
Index terms:Regulations
Borrowing
Welfare
Models
Language:eng
Abstract:This paper develops a model of an agricultural economy in which poor farmers borrow from rich farmers. It compares equilibria with and without political intervention, which takes the form of a moratorium. When bad economic shocks are likely, state-contingent debt moratoria always improve ex post efficiency and may also improve ex ante efficiency. Moreover, the threat of moratoria enhances efficiency. When adverse macro shocks are unlikely, state-contingent moratoria always improve ex ante welfare by completing incomplete debt contracts.
SCIMA record nr: 244355
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