Financial segmentation and collateralized debt in infinite-horizon economies

Abstract

In this paper we address equilibrium existence in economies with default, long-term collateralized debt, and financial market segmentation. We first prove equilibrium existence in the finite-horizon case of our model, by adapting techniques recently applied in two-period economies with segmented financial markets. We then show that a competitive equilibrium exists for infinite-horizon economies when credit markets are composed of finite-lived contracts or infinite-lived contracts that can be refinanced over time. Finally, we show that if credit markets include infinite-lived contracts that cannot be refinanced, an equilibrium exists when per-period utility functions are either additive in at least one commodity or satisfy a substitution condition, which holds for unbounded per-period utility functions. We illustrate our contributions by providing examples of economies that conform with the assumptions of each of our equilibrium existence results. (C) 2018 Elsevier B.V. All rights reserved.