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

Marginal utility, Marginal utility   - It is the measure of the addition...

Marginal utility   - It is the measure of the additional satisfaction obtained from consuming one additional unit of good. * Marginal Utility: An instance - The marginal u

Define Amagat law of partial volume, Define Amagat law of partial volume, ...

Define Amagat law of partial volume, Amagat law of partial volume The total volume of a mixture of non reacting gases at constant temperature & pressure is equal to sum of indiv

Ricardian model - production possibilities frontier, Suppose there are two ...

Suppose there are two countries (home and foreign) and that two goods can be produced within those countries: machinery (M) and bread (B). Marginal product of labor (MPL) is given

Find the equilibrium precaution, Mr. Smith can cause an accident, which ent...

Mr. Smith can cause an accident, which entails a monetary loss of $1000 to Ms. Adams. The likelihood of the accident depends on the precaution decisions by both individuals. Spe

Exceptional demand, how to differentiate the exeptional demand and excepti...

how to differentiate the exeptional demand and exceptional supply?

Closesubstitute goods, Closesubstitute goods: The number of closesubstit...

Closesubstitute goods: The number of closesubstitute goods The more substitutes of good has and the more close the substitutes are, the more elastic the demand for the good. Fo

Risk and cost benefit analysis , COST benefit analysis Costs that ...

COST benefit analysis Costs that are applicable in the project and the benefits that are associated with it are as follows: Risk occurs at different levels. It takes pl

Production for profit, Under capitalism, most production is undertaken by p...

Under capitalism, most production is undertaken by private companies (of various forms), with the goal of generating a profit to the company's owners. Profit is obtained when compa

Types of taxes, Taxes: Compulsory government levies collected to pay for pu...

Taxes: Compulsory government levies collected to pay for public spending. There are numerous types of taxes (corporate, income, wealth, sales, environmentaland payroll taxes); each

Indirect utility functions, Indirect Utility Functions: Let qi denotes...

Indirect Utility Functions: Let qi denotes commodity i and pi is the price of that commodity. Let y denotes money income of the consumer. Suppose vi = pi/y. The budget constra

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