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Endogenous Borrowing Constraints with Incomplete Markets

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  • Zhang, Harold H

Abstract

This article develops ways to endogenize the borrowing constraints used in a class of computable incomplete markets models. The authors allow the constraints to depend on an investor's characteristics, such as time preference, risk aversion, and income streams. The proposed constraint can be interpreted as a borrowing limit within which an investor has no incentive to default. Using a numerical algorithm, the authors find that, for an array of structural parameters, the endogenous borrowing constraints can be much less stringent than the ad hoc borrowing constraints adopted by the existing studies. Copyright 1997 by American Finance Association.

Suggested Citation

  • Zhang, Harold H, 1997. "Endogenous Borrowing Constraints with Incomplete Markets," Journal of Finance, American Finance Association, vol. 52(5), pages 2187-2209, December.
    • Handle: RePEc:bla:jfinan:v:52:y:1997:i:5:p:2187-2209
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    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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