| dc.description.abstract | I study financial arrangements that arise in economies with limited enforcement.
Contractual promises are required to be rational for the obligated party at the time
of fulfillment. Common also to each environment is perfect information. I study each
economy in general equilibrium with competitive markets.
In the first chapter, I study the provision of liquidity by one cohort of private
agents to another building on the three-period model of Holmstrom and Tirole (Journal
of Political Economy, 1998). Entrepreneurs issue financial liabilities to finance
liquid investment. As a precaution against a random cost shock, entrepreneurs
optimally buy, hold, and then sell a security that they cannot issue themselves. In
contrast to Holmstrom and Tirole, I do not allow government liabilities to serve this
purpose. Instead, I require that entrepreneurs liquidity needs be satisfied endogenously
by circulation of third-party liabilities. The appropriate liabilities sell at a
price premium relative to securities that do not serve the liquidity need. Liquidity
uncertainty can distort production allocations among producers with different risk
characteristics, and I show how issuers of circulating liabilities may be interpreted
as banks.
The second chapter presents an infinite time-horizon exchange economy wherein
default cannot be punished by complete banishment from markets. An asset exists
in the economy that cannot be confiscated, and that agents can never be prevented
from trading. The payoff to an agent in default is a function of present and future
prices and the agents ownership share of the non-collateral asset. Greater
ownership implies a higher payoff upon default; but a higher default payoff reduces
trading opportunities in equilibrium. Equilibration may generate volatile time-series
for endogenous variables. I document the quantitative implications by computing
equilibria of a plausibly calibrated economy.
In the last chapter, I study the ability of a simple limited enforcement economy to
explain arbitrary panel consumption data. Subject to satisfaction of mild inequality
restrictions, if the consumption allocation implies that each agents wealth is finite,
there is a feasible punishment institution that induces the data in equilibrium. The
result shows that limited enforcement economies hold significant potential to explain
anomalous features and implications of such data. | |
