"Political Intervention in Debt Contracts"
©
Journal of Political Economy,
October
2002
Volume: 110
|
Issue: 5
|
Pages: 1103-34
Publication type: Journal article
Research Archive Topic: Capital Markets and Investments, Corporate Finance
Abstract
This paper develops a dynamic general equilibrium model of an agricultural economy in which poor farmers borrow from rich farmers. Because output is stochastic (we allow for idiosyncratic and aggregate shocks), there may be default ex post. We compare equilibria with and without political intervention. Intervention takes the form of a moratorium and is decided by voting. When bad economic shocks are highly 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.
Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.
Each topic is linked to an index of publications on that topic.