Grochulski, Borys and Zhang, Yuzhe (2009): Borrowing Constraint as an Optimal Contract.
Download (309Kb) | Preview
We study a continuous-time version of the optimal risk-sharing problem with one-sided commitment. In the optimal contract, the agent's consumption is non-decreasing and depends only on the maximal level of the agent's income realized to date. In the complete-markets implementation of the optimal contract, the Alvarez-Jermann solvency constraints take the form of a simple borrowing constraint familiar from the Bewley-Aiyagari incomplete-markets models. Unlike in the incomplete-markets models, however, the asset buffer stock held by the agent is negatively correlated with income.
|Item Type:||MPRA Paper|
|Original Title:||Borrowing Constraint as an Optimal Contract|
|Keywords:||Borrowing constraint, limited commitment|
|Subjects:||D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D86 - Economics of Contract: Theory
D - Microeconomics > D5 - General Equilibrium and Disequilibrium > D52 - Incomplete Markets
|Depositing User:||Yuzhe Zhang|
|Date Deposited:||10. Jun 2010 16:35|
|Last Modified:||16. Feb 2013 05:30|
Albanesi, S., Sleet, C., 2006. Dynamic optimal taxation with private information. Review of Economic Studies 73, 1-30.
Albuquerque, R., Hopenhayn, H., 2004. Optimal lending contracts and rm dynamics. Review of Economic Studies 71, 285-315.
Alvarez, F., Jermann, U., 2000. Eciency, equilibrium, and asset pricing with risk of default. Econometrica 68(4), 775-797.
Biais, B., Mariotti, T., Plantin, G., Rochet, J., 2007. Dynamic security design: Convergence to continuous time and asset pricing implications. Review of Economic Studies 74, 345-390.
Borodin, A., Salminen, P., 2002. Handbook of Brownian Motion - Facts and Formulae, 2nd ed. Birkhauser.
Demarzo, P., Sannikov, Y., 2007. Optimal security design and dynamic capital structure in a continuous-time agency model. The Journal of Finance 61, 2681-2724.
Eaton, J., Gersovitz, M., 1981. Debt with potential repudiation: Theoretical and empirical analysis. Review of Economic Studies 48(2), 289-309.
Fleming, W., Soner, H., 2006. Controlled Markov Processes and Viscosity Solutions, Second Edition. Springer Science+ Business Media, Inc., New York, NY, USA.
Harris, M., Holmstrom, B., 1982. A theory of wage dynamics. Review of Economic Studies 49, 315-333.
He, Z., 2009. Optimal executive compensation when firm size follows geometric brownian motion. Review of Financial Studies 22, 859-892.
Karatzas, I., Shreve, S., 1991. Brownian Motion and Stochastic Calculus, 2nd ed. Springer-Verlag.
Kehoe, T., Levine, D., 1993. Debt-constrained asset markets. Review of Economic Studies 60(4), 865-888.
Kocherlakota, N., 1996. Implications of efficient risk sharing without commmitment. Review of Economic Studies 63(4), 595-609.
Krueger, D., Perri, F., 2006. Does income inequality lead to consumption inequality? evidence and theory. Review of Economic Studies 73, 163-193.
Krueger, D., Uhlig, H., 2006. Competitive risk sharing contracts with one-sided commitment. Journal of Monetary Economics 53, 1661-1691.
Ljungqvist, L., Sargent, T., 2004. Recursive Macroeconomic Theory, Second Edition. The MIT Press, Cambridge, Massachusetts, USA.
Piskorski, T., Tchistyi, A., forthcoming. Optimal mortgage design. Review of Financial Studies.
Sannikov, Y., 2008. A continuous-time version of the principal-agent problem. Review of Economic Studies 75, 957-984.
Thomas, J., Worral, T., 1988. Self-enforcing wage contracts. Review of Economic Studies 55, 541-554.
Zhang, Y., 2009. Dynamic contracting with persistent shocks. Journal of Economic Theory 144, 635-675. 40