Political Intervention in Debt Contracts ¤

@inproceedings{Bolton2001PoliticalII,
  title={Political Intervention in Debt Contracts ¤},
  author={Patrick F. Bolton and Howard Rosenthal},
  year={2001}
}
This paper develops a dynamic general equilibrium model of an agricultural economy in which poor farmers borrow from rich farmers. Because output is stochastic (we allow for idiosyncratic and aggregate shocks), there may be default ex post. We compare equilibria with and without political intervention. Intervention takes the form of a moratorium and is decided by voting. When bad economic shocks are highly likely, state-contingent debt moratoria always improve ex post efficiency and may also… CONTINUE READING
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