Dynamic Financial Constraints: Distinguishing Mechanism Design from Exogenously Incomplete Regimes

"Dynamic Financial Constraints: Distinguishing Mechanism Design from Exogenously Incomplete Regimes." Alexander Karaivanov and Robert M. Townsend. Econometrica, 82 (3) 2014: 887–959. ABSTRACT PDF

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2014

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This paper formulates and solves a range of dynamic models of constrained credit/insurance that allow for moral hazard and limited commitment.  It then compares them to full insurance and exogenously incomplete financial regimes, including autarky, saving only and borrowing and lending in a single asset.  Through developed computational methods, models using data on Thai households running small businesses in two separate sample of rural and urban Thailand are estimated.