Endogenous trading constraints with incomplete asset markets

@article{brahm2010EndogenousTC,
  title={Endogenous trading constraints with incomplete asset markets},
  author={{\'A}rp{\'a}d {\'A}brah{\'a}m and Eva C{\'a}rceles-Poveda},
  journal={J. Economic Theory},
  year={2010},
  volume={145},
  pages={974-1004}
}
This paper endogenizes the borrowing constraints on capital holdings in an in…nite horizon incomplete markets model with production and idiosyncratic risk. In particular, it assumes that households can break their trading arrangements by going into …nancial autarky, in which case they are excluded from future asset trade. We study the economy with the loosest possible borrowing limits that prevent default in equilibrium. We …nd that these limits are signi…cantly di¤erent from zero, which is the… CONTINUE READING

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