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Endogenous debt constraints in a life-cycle model with an application to social security

By Martin Gervais and David Andolfatto

Abstract

This paper develops a simple life-cycle model that embeds a theory of debt restrictions based on the existence of inalienable property rights à la Kehoe and Levine [1993. Debt constrained asset markets. Review of Economic Studies 60(4), 865–888; 2001. Liquidity constrained markets versus debt constrained markets. Econometrica 69(3), 575–598]. In our environment, net debtors have the option of defaulting on unsecured debt at the cost of being subjected to wage garnishment and/or having some or all of their future assets seized by creditors. One advantage of our framework is that it encompasses two standard versions of the life-cycle model: one with perfect capital markets and one with a non-negative net-worth restriction. We study the impact of a payroll financed social security system to illustrate the role of endogenous debt constraints and compare our results to a model with exogenous debt constraints. Whereas the aggregate effects are similar under both types of constraints, the distributional consequences are found to be significantly different across debt regimes

Topics: HB
Year: 2008
OAI identifier: oai:eprints.soton.ac.uk:155881
Provided by: e-Prints Soton
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