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CREDIT AND GROWTH UNDER LIMITED COMMITMENT

Published online by Cambridge University Press:  01 April 2008

COSTAS AZARIADIS  and
LEO KAAS
COSTAS AZARIADIS
Affiliation:
Washington University, St. Louis
LEO KAAS*
Affiliation:
University of Konstanz
*
Address correspondence for Leo Kaas, Department of Economics, University of Konstanz, Box D145, 78457 Konstanz, Germany; e-mail: leo.kaas@uni-konstanz.de.
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Abstract

We consider a linear growth model with idiosyncratic productivity shocks in which producers cannot commit to repay their loans. Borrowing constraints are determined endogenously by the borrowers' incentives to repay, assuming that defaulters lose a share of output and are excluded from future trade in the credit market. We characterize necessary and sufficient conditions for the enforceability of a first-best equilibrium growth path. Weak property rights, impatient producers, and small productivity differentials can make the efficient growth path nonenforceable and lead to an inefficient equilibrium with binding borrowing constraints. For some economies, multiple balanced growth paths coexist.

Keywords

Endogenous GrowthLimited EnforcementBorrowing Constraints
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 12 , Supplement S1: Dynamic Macroeconomic Theory , April 2008 , pp. 20 - 30
Copyright
Copyright © Cambridge University Press 2008

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References

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