Optimal Financial Exclusion

We study efficient exclusion policies in a canonical credit model that features both exogenous and strategic default along the equilibrium path. Policies that maximize welfare in a stationary equilibrium implement exclusion for a finite and deterministic number of periods following default. Front-loading exclusion makes the mass of socially valuable transactions as high as it can be in steady state. Less intuitively, doing so also maximizes the average welfare of excluded agents in equilibrium conditional on the level of incentives provided by the threat of exclusion. We argue that these results are robust to a host of natural variations on our benchmark model. (JEL C73, D53, D86, G21, G32, G51)

CO-MOVEMENT OF STEADY-STATE GOVERNMENT DEBT AND HOUSEHOLD DEBT

To understand whether and how movements of government debt and household debt are related, stationary equilibrium government debt and household debt are characterized in a politico-economic model where office-seeking policymakers decide government debt and individual voters can borrow facing uninsurable idiosyncratic income shocks. An increase in uninsurable income risk unconditionally raises stationary equilibrium government debt and aggregate household debt together, while an increase in household-loan collateral value or population aging conditionally does so, entailing positive correlations between these two debts’ movements. In contrast, an increase in interest rate conditionally causes these two debts to move in the opposite directions.

Limit Equilibrium Payoffs in Stochastic Games

We study the limit of equilibrium payoffs, as the discount factor goes to one, in non-zero-sum stochastic games. We first show that the set of stationary equilibrium payoffs always converges. We then provide two-player examples in which the whole set of equilibrium payoffs diverges. The construction is robust to perturbations of the payoffs and to the introduction of normal-form correlation.

Solving discrete time heterogeneous agent models with aggregate risk and many idiosyncratic states by perturbation

This paper describes a method for solving heterogeneous agent models with aggregate risk and many idiosyncratic states formulated in discrete time. It extends the method proposed by Reiter (2009) and complements recent work by Ahn, Kaplan, Moll, Winberry, and Wolf (2017) on how to solve such models in continuous time. We suggest first solving for the stationary equilibrium of the model without aggregate risk. We then write the functionals that describe the dynamic equilibrium as sparse expansions around their stationary equilibrium counterparts. Finally, we use the perturbation method of Schmitt‐Grohé and Uribe (2004) to approximate the aggregate dynamics of the model.

Venture capital and microfinance: an instrumental approach

<p>Following Adolph Lowe, we divide the economy into two sectors, equipment-goods industries and consumer-goods industries, operating over two periods. A structural relationship between the outputs in the two periods is given by a set of inequalities. One possible outcome is a state of less-than-full utilization of available resources. The economy consists of firms and households. Firms are technology entrepreneurs possessing blueprints for the transformation of the existing inefficient level of output to a full employment level, but no wealth. A subset of households, venture capitalists, is available in each of the three sectors. They finance the technologies in exchange for a share of the profits. We show that a stationary equilibrium exists only in the case when financial contracts are written in the second sector.</p>