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Credit and Bankruptcy in a Temporary Equilibrium Model

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  • Weiye Cheny

    (Graduate School of Economics, Osaka University)

Abstract

A temporary general equilibrium in bankruptcy model with finite periods was analyzed in this paper, which (i) every consumer only issues one type of bond to financial market in each period; (ii) the bank has right to circulate currency, and never face bankruptcy. The model was an extesion of the Bankruptcy model in Eichberger(1989), based on the assumptions that the occurrence of moral hazard is prevented by the credit scheme law, which depends on the current information and forecast function. The main result of this paper enables as to develop the liquidation rule without penalties. This rule can also be used to interpret liquidating distribution in Bankruptcy Act. In addition, the bankruptcy mechanism plays an effective role even if the chain-reaction bankruptcy occurred. Moreover, we can prove that the economy will never collapse in an overlapping model which has some newborn in every period.

Suggested Citation

  • Weiye Cheny, 2018. "Credit and Bankruptcy in a Temporary Equilibrium Model," Discussion Papers in Economics and Business 18-23, Osaka University, Graduate School of Economics.
    • Handle: RePEc:osk:wpaper:1823
    as

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    References listed on IDEAS

    as
    1. Michael Rothschild & Joseph Stiglitz, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 90(4), pages 629-649.
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    3. Pradeep Dubey & John Geanakoplos & Martin Shubik, 2000. "Default in a General Equilibrium Model with Incomplete Markets," Cowles Foundation Discussion Papers 1247, Cowles Foundation for Research in Economics, Yale University.
    4. Salvatore Modica & J.-Marc Tallon & Aldo Rustichini, 1998. "Unawareness and bankruptcy: A general equilibrium model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(2), pages 259-292.
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    6. Mário R. Páscoa & Aloisio P. Araujo, 2002. "Bancruptcy in a model of unsecured claims," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 20(3), pages 455-481.
    7. Eichberger, Jurgen, 1989. "A Note on Bankruptcy Rules and Credit Constraints in Temporary Equilibrium," Econometrica, Econometric Society, vol. 57(3), pages 707-715, May.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Temporary equilibrium; Bankruptcy; Credit scheme; Liquidation rule; Money;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • D59 - Microeconomics - - General Equilibrium and Disequilibrium - - - Other

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