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Production, Bankruptcy, and Financial Policies under Collateral Constraints

Leon-Ledesma, Miguel A., Orrillo, Jaime (2021) Production, Bankruptcy, and Financial Policies under Collateral Constraints. Mathematical Social Sciences, 112 . pp. 109-119. ISSN 0165-4896. (doi:10.1016/j.mathsocsci.2021.03.010) (KAR id:87305)

Abstract

We propose an extension of the incomplete markets general equilibrium model with production to situations in which firms can default (bankruptcy). In the model, firms are owned by a single individual whose roles as entrepreneur and consumer are anonymous. Assets are exogenously collateralised and are seized together with future output in case of default. Default is thus endogenous as output determines the deliveries from the assets issued. In turn, the receipts from each asset purchased are assumed to depend on a fraction of the firm’s output. This fraction is anonymous and is treated as given by individuals who will anticipate it, in equilibrium, as a proportion of aggregate output, generating counter-cyclical default. We show that, in this context, the financial policies of the firm are, in general, not irrelevant. We establish the existence of equilibria and discuss the nature of the inefficiencies introduced by the presence of bankruptcy.

Item Type: Article
DOI/Identification number: 10.1016/j.mathsocsci.2021.03.010
Uncontrolled keywords: General equilibrium; Incomplete markets; default; production economy
Subjects: H Social Sciences > HB Economic Theory
H Social Sciences > HJ Public Finance
Divisions: Divisions > Division of Human and Social Sciences > School of Economics
Depositing User: Miguel Leon-Ledesma
Date Deposited: 29 Mar 2021 10:16 UTC
Last Modified: 10 Apr 2022 23:00 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/87305 (The current URI for this page, for reference purposes)
Leon-Ledesma, Miguel A.: https://orcid.org/0000-0002-3558-2990
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