TY  - JOUR
AU  - Kehoe,Timothy J.
AU  - Levine,David K.
TI  - Bankruptcy and Collateral in Debt Constrained Markets
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 12656
PY  - 2006
Y2  - October 2006
UR  - http://www.nber.org/papers/w12656
L1  - http://www.nber.org/papers/w12656.pdf
N1  - Author contact info:
Timothy J. Kehoe
University of Minnesota
Department of Economics
1925 Fourth Street South
Minneapolis, MN 55455-0462
Tel: 612/625-1589
Fax: 612/204-5515
E-Mail: tkehoe@umn.edu

David K. Levine
Washington University
Department of Economics
Campus Box 1208
St. Louis, MO 63130-4899
Tel: 314/935-5670
Fax: 314/935-4156
E-Mail: david@dklevine.com
AB  - Typical models of bankruptcy and collateral rely on incomplete asset markets.  In fact, bankruptcy and collateral add contingencies to asset markets.  In some models, these contingencies can be used by consumers to achieve the same equilibrium allocations as in models with complete markets.  In particular, the equilibrium allocation in the debt constrained model of Kehoe and Levine (2001) can be implemented in a model with bankruptcy and collateral.  The equilibrium allocation is constrained efficient. Bankruptcy occurs when consumers receive low income shocks.  The implementation of the debt constrained allocation in a model with bankruptcy and collateral is fragile in the sense of Leijonhufvud's "corridor of stability," however:  If the environment changes, the equilibrium allocation is no longer constrained efficient.
ER  -