Affiliation:
1. BIS, University of Bern and SZ Gerzensee (email: )
2. University of Wisconsin–Madison (email: )
Abstract
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)
Publisher
American Economic Association
Subject
General Economics, Econometrics and Finance
Cited by
1 articles.
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