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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. |
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