The result that the lenders are better off by reducing the face value of debt is the same as the classical argument of debt overhang or the debt Laffer curve (Sachs 1988; Krugman 1988), which is about the sovereign debt, while our focus in this paper is on private debt. [...] To facilitate debt restructuring, the government can subsidize the lenders to partially compensate the loss of debt write-off so that the optimal amount of debt reduction is 1Lamont (1995) argue that the investment is reduced by the macroeconomic debt overhang due to the spillover effect, that is similar to the aggregate demand externality in our model. [...] Lender’s problem: The households (or lenders) maximize the expected value of their consumption in period 2, given that their choice is either to sell capital K to the firms in exchange for the risky debt or to hold the capital and sell it in the next period for the use in C-sector. [...] Thus, the households’ decision-making in period 1 is degenerated such that they sell the capital to the firms if the following participation condition (PC) is satisfied, and they hold the capital until period 2 if the PC is not satisfied. [...] We do not further specify the condition for multiple equilibria, though, as our focus is on the analysis in the case where there is a large asset-price boom, which corresponds to the case where AH is sufficiently large and the equilibrium is the DOE.
- Pages
- 35
- Published in
- Japan
