Bloise, Gaetano, Polemarchakis, H. M. and Vailakis, Yiannis (2021) Sustainable debt. Theoretical Economics, 16 (4). pp. 1513-1555. doi:10.3982/TE4173 ISSN 1933-6837.

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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:	Journal Article
Subjects:	H Social Sciences > HB Economic Theory H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Debt, Interest rates, Ponzi schemes, Equilibrium (Economics)
Journal or Publication Title:	Theoretical Economics
Publisher:	Econometric Society
ISSN:	1933-6837
Official Date:	November 2021
Dates:	Date Event November 2021 Published 7 February 2021 Accepted
Volume:	16
Number:	4
Page Range:	pp. 1513-1555
DOI:	10.3982/TE4173
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Open Access (Creative Commons)
Date of first compliant deposit:	12 February 2021
Date of first compliant Open Access:	9 November 2021
RIOXX Funder/Project Grant:	Project/Grant ID RIOXX Funder Name Funder ID PRIN 2015 Italy. Ministero della pubblica istruzione http://viaf.org/viaf/143578464 FP7, Ideas specific program, Project 240983 DCFM European Research Council http://dx.doi.org/10.13039/501100000781 Projects Novo Tempus and FIRE [ANR] Agence Nationale de la Recherche http://dx.doi.org/10.13039/501100001665
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