Political Intervention in Debt Contracts

Patrick G M Bolton · Howard L. Rosenthal

152 citations0/0 files storedJournal of Political Economy

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Abstract

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 improve ex ante efficiency. Moreover, the threat of moratoria enhances efficiency. When adverse macro shocks are unlikely, state‐contingent moratoria always improve ex ante welfare by completing incomplete debt contracts.

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References

1994A Theory of Debt Based on the Inalienability of Human Capital 1996Optimal Debt Structure and the Number of Creditors 1991A Theory of Debt Based on the Inalienability of Human Capital 1998Default and Renegotiation: A Dynamic Model of Debt 2001The right to vote: the contested history of democracy in the United States 1962Economic Growth of the United States 2017The Economic Growth of the United States, 1790-1860 2001The Right to Vote, The Contested History of Democracy in the United States

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