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  3. American Economic Journal: Microeconomics
  4. November 2021
  5. Optimal Financial Exclusion

Optimal Financial Exclusion

  • Cyril Monnet
  • Erwan Quintin
American Economic Journal: Microeconomics
vol. 13, no. 4, November 2021
(pp. 101-34)
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Abstract

We study efficient exclusion policies in a canonical credit model that features both exogenous and strategic default along the equilibrium path. Policies that maximize welfare in a stationary equilibrium implement exclusion for a finite and deterministic number of periods following default. Front-loading exclusion makes the mass of socially valuable transactions as high as it can be in steady state. Less intuitively, doing so also maximizes the average welfare of excluded agents in equilibrium conditional on the level of incentives provided by the threat of exclusion. We argue that these results are robust to a host of natural variations on our benchmark model.

Citation

Monnet, Cyril, and Erwan Quintin. 2021. "Optimal Financial Exclusion." American Economic Journal: Microeconomics, 13 (4): 101-34. DOI: 10.1257/mic.20190005

Additional Materials

JEL Classification

  • C73 Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
  • D53 General Equilibrium and Disequilibrium: Financial Markets
  • D86 Economics of Contract: Theory
  • G21 Banks; Depository Institutions; Micro Finance Institutions; Mortgages
  • G32 Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
  • G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
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