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The Political Economy of Debt Moratoria, Bailouts and Bankruptcy

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  • Patrick Bolton
  • Howard Rosenthal

Abstract

This paper develops a simple dynamic general equilibrium model of an agricultural economy, in which poor farmers borrow wheat from rich farmers to invest in their land. Since wheat output is stochastic (we allow for both idiosynchratic and aggregate shocks) there may be default ex-post. The main thrust of the paper is to compare equilibria in this economy with and without political intervention. This intervention is decided through majority voting and can take the form of a bailout or a moratorium. The results of our formal analysis are confronted with historial evidence from the Panic of 1819 in the U. S. With no aggregate uncertainty, the main results of the formal analysis are that allowing for debt moratoria and bailouts not only always improves ex-post efficiency but may improve ex-ante efficiency. Anticipated bailouts always occur in equilibrium and moratoria never occur, but the threat of moratoria enhances efficiency. With aggregate uncertainty, the differences between moratoria and bailouts may collapse, with both occurring only in bad times and improving ex-ante efficiency.

Suggested Citation

  • Patrick Bolton & Howard Rosenthal, 1999. "The Political Economy of Debt Moratoria, Bailouts and Bankruptcy," Research Department Publications 3068, Inter-American Development Bank, Research Department.
    • Handle: RePEc:idb:wpaper:3068
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    References listed on IDEAS

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