Sustainable debt

Bloise, G., Polemarchakis, H. and Vailakis, Y. (2021) Sustainable debt. Theoretical Economics, 16(4), pp. 1513-1555. (doi: 10.3982/te4173)

Abstract

We show that debt is sustainable at a competitive equilibrium based solely on the reputation for repayment; that is, even without collateral or legal sanctions available to creditors. In an incomplete asset market, when the rate of interest falls recurrently below the rate of growth of the economy, 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.

• Item Type: Articles
• Additional Information: Gaetano Bloise acknowledges the financial support of the Italian Ministry of Education (PRIN 2015). Yiannis Vailakis acknowledges the financial support of an ERC starting grant (FP7, Ideas specific program, Project 240983 DCFM) and of two ANR research grants (Projects Novo Tempus and FIRE).
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Vailakis, Professor Yiannis
• Authors: Bloise, G., Polemarchakis, H., and Vailakis, Y.
• College/School: College of Social Sciences > Adam Smith Business School > Economics
• Journal Name: Theoretical Economics
• Publisher: Wiley
• ISSN: 1933-6837
• ISSN (Online): 1555-7561
• Copyright Holders: Copyright © 2021 The Authors
• First Published: First published in Theoretical Economics 16(4):1513–1555
• Publisher Policy: Reproduced under a Creative Commons License

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