Sustainable Debt
The DEMS Economics Seminar series is proud to host
Gaetano Bloise
(University of Rome II (Tor Vergata))
with H. Polemarchakis, Y. Vailakis
ABSTRACT
Conventional wisdom asserts that debt is unsustainable when not secured by collateral or by sanctions that creditors can exercise against debtors upon default (Bulow-Rogoff, 1989). Instead, we argue that creditors can rely on the self-interest of debtors in maintaining a reputation for repayment. We identify the implicit enforcement mechanism and prove the existence of a competitive equilibrium with unsecured debt. Under uninsurable risk, self-insurance is more costly than borrowing, and repayments on loans are enforced by the implicit threat of loss of the risk-sharing advantages of debt contracts. Private debt credibly circulates as a form of inside money, and it is not valued as a speculative bubble. Competitive equilibria with self-enforcing debt exist under a suitable hypothesis of gains from trade.
The seminar will be in presence, Seminar Room 2104, Building U7-2nd floor