Econometrica: Nov 1977, Volume 45, Issue 8

A Model of Borrowing and Lending with Bankruptcy

https://doi.org/0012-9682(197711)45:8<1879:AMOBAL>2.0.CO;2-H
p. 1879-1906

Martin F. Hellwig

The paper analyzes borrowing and lending on uncertain future income, with a positive probability of bankruptcy. Creditor and debtor play a strategic game, in which it is shown that optimal creditor behavior is not generally well defined. The model suggests that under uncertainty the availability of credit may be restricted below that which would be predicted by classical microeconomic theory.

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