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

Externalities, What are corrective taxes? Why do economists prefer them to ...

What are corrective taxes? Why do economists prefer them to regulations as a way to protect the environment from pollution. Discuss

Trends in the growth of production and productivity, Trends in the Growth ...

Trends in the Growth of Production and  Productivity: From an analysis of the trends of growth of production and productivity of agricultural sector as a whole and of differen

Theory of perfect competition, Perfect competition has the following charac...

Perfect competition has the following characteristics: 1. Large number of firms - There are a large number of firms in the market. Due to this each firm produces a very small fr

The nature of policy-making, The Nature of Policy-Making : It follows...

The Nature of Policy-Making : It follows that recommending policy must itself be a subjective exercise. The effects of particular-policies at a particular historical juncture

Marginal product, I am having a hard time figuring out how to find marginal...

I am having a hard time figuring out how to find marginal product.

Explain how normal profit and abnormal profit differ, Explain how normal pr...

Explain how normal profit and abnormal profit differ. Normal profit (breakeven) - which must contain commentary on the inclusion of opportunity costs. Abnormal profit should be

Uncompensated demand curves, Using a graph of the compensated and uncompens...

Using a graph of the compensated and uncompensated demand curves, show how the magnitudes of the CV, EV, and  ?CS will be related to each other when there is a ceteris paribus incr

Define law of demand, Define law of demand.  Answer:   Quantity demande...

Define law of demand.  Answer:   Quantity demanded increases as price falls, other things constant. In other words, "Other things remaining the same, when the price of a good r

Keynesian cross, explain how the keynesian cross shows that the economy is ...

explain how the keynesian cross shows that the economy is susceptible to self-fulfilling prophesies, either positive or negative

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