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On borrowing limits and welfare

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Abstract

We study the effect of borrowing limits on welfare in several versions of exchange and production economies. There is a "quantity" effect of a larger borrowing limit which is beneficial for liquidity constrained agents, but essentially irrelevant otherwise. There is also a "price effect" which tends to increase the interest rate so that lenders are better off and borrowers are worse off. The combination of these effects produces that aggregate welfare in equilibrium (or ex ante welfare) displays an inverted U-shape as a function of the borrowing limit. In infinite horizon economies with incomplete markets we find a sizable "middle class" of not liquidity constrained but indebted agents that observes small gains, or even loses, after the borrowing limit is enlarged.

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  • Francesc Obiols-Homs, 2009. "On borrowing limits and welfare," UFAE and IAE Working Papers 804.09, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    • Handle: RePEc:aub:autbar:804.09
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    Cited by:

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    2. Pham, Ngoc-Sang, 2018. "Credit limits and heterogeneity in general equilibrium models with a finite number of agents," MPRA Paper 88736, University Library of Munich, Germany.
    3. Alvarez-Cuadrado, Francisco & Japaridze, Irakli, 2017. "Trickle-down consumption, financial deregulation, inequality, and indebtedness," Journal of Economic Behavior & Organization, Elsevier, vol. 134(C), pages 1-26.
    4. Gustavo Mellior, 2020. "Higher education funding, welfare and inequality in equilibrium," Studies in Economics 2005, School of Economics, University of Kent.
    5. Antonio Antunes & Valerio Ercolani, 2020. "Public debt expansions and the dynamics of the household borrowing constraint," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 1-32, July.
    6. Ngoc‐Sang Pham & Hien Pham, 2021. "Effects of credit limit on efficiency and welfare in a simple general equilibrium model," International Journal of Economic Theory, The International Society for Economic Theory, vol. 17(4), pages 446-470, December.
    7. Röhrs, Sigrid & Winter, Christoph, 2015. "Public versus private provision of liquidity: Is there a trade-off?," Journal of Economic Dynamics and Control, Elsevier, vol. 53(C), pages 314-339.
    8. Leimbach Marian & Baumstark Lavinia & Luderer Gunnar, 2015. "The Role of Time Preferences in Explaining the Long-Term Pattern of International Trade," Global Economy Journal, De Gruyter, vol. 15(1), pages 83-106, March.
    9. Pham, Ngoc-Sang, 2023. "Some Lectures on Macroeconomics," MPRA Paper 119643, University Library of Munich, Germany.
    10. Marian Leimbach & Baumstark, Lavinia, 2011. "Intertemporal trade and the Integrated Assessment of climate change mitigation policies," EcoMod2011 3036, EcoMod.
    11. Rodrigo Azuero & David Zarruk Valencia, 2016. "The Effects of Student Loans on the Provision and Demand for Higher Education," PIER Working Paper Archive 17-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 22 Oct 2017.
    12. Ngoc-Sang Pham, 2022. "Impacts of (individual and aggregate) productivity and credit shocks on equilibrium aggregate production," Working Papers halshs-03686284, HAL.
    13. Kartik B. Athreya & Xuan S. Tam & Eric Young, 2012. "Debt default and the insurance of labor income risks," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 98(4Q), pages 255-307.

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    More about this item

    Keywords

    Borrowing constraints; incomplete markets; welfare;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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