Grochulski, Borys and Zhang, Yuzhe (2009): Borrowing Constraint as an Optimal Contract.
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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|
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