Collateral constraint of a consumer, Microeconomics

Assignment Help:

Suppose that there is a credit market imperfection because of limited commitment. As in the setup with collateralized wealth, each consumer has a component of wealth which has value pH in the future period, cannot be sold currently, and can be pledged as collateral against loans. Suppose also that the government requires each consumer to pay a lump-sum tax t in the current period and a tax t' in the future period. Also suppose there is a limited commitment with respect to taxation. That is, if a consumer refuses to pay his or her taxes, the government can seize the consumer's collateralizable wealth but cannot confiscate the consumer's endowment. Assume that if a consumer fails to pay off debts to private lenders and also fails to pay his or her taxes, the government has to be paid first from the consumer's collateralizable wealth.

a. Show how the limited commitment problem puts a limit on how much the government can spend in the current and future periods.  

b. Write down the consumer's collateral constraint, taking into account the limited commitment problem with respect to taxes.  

c. Now suppose the government reduces t and increase t' so that the government's budget constraint continues to hold. What will be the effects on an individual consumer's consumption in the present and the future? Explain when the collateral constraint is binding for the consumer and when not. Does Ricardian equivalence hold in this economy? Explain why or why not. 


Related Discussions:- Collateral constraint of a consumer

Rational expectations and economic theory , RATIONAL EXPECTATIONS AND ECONO...

RATIONAL EXPECTATIONS AND ECONOMIC THEORY : We assumed above that the role of economic theory is not to provide quantitative predictions about the future. Suppose we assume ins

Economic system, explain the fundamental task of economic system usin tomat...

explain the fundamental task of economic system usin tomatoes as an example

Price/earnings (p/e) ratio, Price/Earnings (P/E) Ratio This is a measur...

Price/Earnings (P/E) Ratio This is a measure of an organization investment potential. Literally, a P/E ratio is how much a share is worth per dollar of earnings. The price-earn

Concept of diminishing returns, in aid of a diagram explain the concept of ...

in aid of a diagram explain the concept of diminishing returns in production

Production function, A competitive firm produces output using three fixed f...

A competitive firm produces output using three fixed factors and one variable factor. The firm’s short-run production function is q = 154x – 5x2, where x is the amount of variable

Long-run static equilibrium solution, (a) What  are the problems associated...

(a) What  are the problems associated with R 2 and how can adjusted R 2 solve them? (b) If the regressors  in an equation are highly correlated, which measures can be used to

Domestic development agenda, Problem : (a) Using examples of Least Deve...

Problem : (a) Using examples of Least Developed Countries, explain the: (i) causes of market failures; and (ii) consequences of market failures (b) Describe the common

Bonds, Contribution of bonds in n economy.

Contribution of bonds in n economy.

Define injections and withdrawals, Define injections and withdrawals.  ...

Define injections and withdrawals.   "The inflows in circular flow of income are known as injections". Investment, government spending and exports are there in injections "The

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd