Endogenous debt constraints in a life-cycle model with an application to social security
Endogenous debt constraints in a life-cycle model with an application to social security
This paper develops a simple life-cycle model that embeds a theory of debt restrictions based on the existence of inalienable property rights à la Kehoe and Levine [1993. Debt constrained asset markets. Review of Economic Studies 60(4), 865–888; 2001. Liquidity constrained markets versus debt constrained markets. Econometrica 69(3), 575–598]. In our environment, net debtors have the option of defaulting on unsecured debt at the cost of being subjected to wage garnishment and/or having some or all of their future assets seized by creditors. One advantage of our framework is that it encompasses two standard versions of the life-cycle model: one with perfect capital markets and one with a non-negative net-worth restriction. We study the impact of a payroll financed social security system to illustrate the role of endogenous debt constraints and compare our results to a model with exogenous debt constraints. Whereas the aggregate effects are similar under both types of constraints, the distributional consequences are found to be significantly different across debt regimes.
life-cycle, debt constraints, social security
3745-3759
Gervais, Martin
c03b188f-08e2-42a6-abca-b64b362a4065
Andolfatto, David
8d4a2546-7da7-465e-b112-449a98246711
December 2008
Gervais, Martin
c03b188f-08e2-42a6-abca-b64b362a4065
Andolfatto, David
8d4a2546-7da7-465e-b112-449a98246711
Gervais, Martin and Andolfatto, David
(2008)
Endogenous debt constraints in a life-cycle model with an application to social security.
Review of Economic Dynamics, 32 (12), .
(doi:10.1016/j.jedc.2008.03.005).
Abstract
This paper develops a simple life-cycle model that embeds a theory of debt restrictions based on the existence of inalienable property rights à la Kehoe and Levine [1993. Debt constrained asset markets. Review of Economic Studies 60(4), 865–888; 2001. Liquidity constrained markets versus debt constrained markets. Econometrica 69(3), 575–598]. In our environment, net debtors have the option of defaulting on unsecured debt at the cost of being subjected to wage garnishment and/or having some or all of their future assets seized by creditors. One advantage of our framework is that it encompasses two standard versions of the life-cycle model: one with perfect capital markets and one with a non-negative net-worth restriction. We study the impact of a payroll financed social security system to illustrate the role of endogenous debt constraints and compare our results to a model with exogenous debt constraints. Whereas the aggregate effects are similar under both types of constraints, the distributional consequences are found to be significantly different across debt regimes.
Text
andolfatto_gervais_jedc_2008.pdf
- Version of Record
Restricted to Repository staff only
More information
Published date: December 2008
Keywords:
life-cycle, debt constraints, social security
Identifiers
Local EPrints ID: 155881
URI: http://eprints.soton.ac.uk/id/eprint/155881
ISSN: 1094-2025
PURE UUID: 26443362-d5fa-48da-89ca-9d61c6b7c1c2
Catalogue record
Date deposited: 01 Jun 2010 09:23
Last modified: 14 Mar 2024 01:40
Export record
Altmetrics
Contributors
Author:
Martin Gervais
Author:
David Andolfatto
Download statistics
Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.
View more statistics