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Martingale properties of self-enforcing debt

Not-too-tight debt limits are endogenous restrictions on debt that prevent agents from defaulting and opting for a specified continuation utility, while allowing for maximal credit expansion. For an agent facing some fixed prices for the Arrow securities, we prove that discounted not-too-tight debt...

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Bibliographic Details
Published in:Economic theory 2015-09, Vol.60 (1), p.35-57
Main Authors: Bidian, Florin, Bejan, Camelia
Format: Article
Language:English
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Summary:Not-too-tight debt limits are endogenous restrictions on debt that prevent agents from defaulting and opting for a specified continuation utility, while allowing for maximal credit expansion. For an agent facing some fixed prices for the Arrow securities, we prove that discounted not-too-tight debt limits must differ by a martingale.
ISSN:0938-2259
1432-0479
DOI:10.1007/s00199-014-0832-0