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

Explain about non-renewable resources, How the above would apply to non-ren...

How the above would apply to non-renewable resources such as oil. This has general applicability to any competitive market. The issue here is that potential supply has a finite

Explain the monopolistic excess capacity, Theories of Chamberlin’s monopoli...

Theories of Chamberlin’s monopolistic competition and Joan Robinson’s imperfect competition have revealed that a firm under monopolistic competition or imperfect competition in lon

What are expansionary and contractionary effects, What are expansionary and...

What are expansionary and contractionary effects?  Expansionary effect refers to the effect of raising the equilibrium level of national income. For example, an increase in gov

Planned order releases - mrp system, Planned Order Releases - MRP System ...

Planned Order Releases - MRP System In an MRP system, if gross requirements exceed the quantity on hand and on order, a net requirement results. Planned orders are created to

Pareto efficiency, #question.explain three neccessary condition to achieve ...

#question.explain three neccessary condition to achieve pareto efficiency.

Nominal exchange, if the Japanese yen appreciates against the U.S. dollar, ...

if the Japanese yen appreciates against the U.S. dollar, do the Japanese businesses gain by a decrease in the dollar price of exports to the United States

Forest resources , Normal 0 false false false EN-IN X...

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

Microeconomic international policy, Ask questi‘Social welfare functions emb...

Ask questi‘Social welfare functions embody a normative conception of the relative importance of equity and efficiency’. With the aid of diagrams, illustrate and explain this propos

Contingent commodity framework, 1) Lynne's income is £2, 000 and she is ris...

1) Lynne's income is £2, 000 and she is risk averse. The probability of someone slipping on her stairs is 1/8. If this happens, she will be sued for £1, 000 and will have to pay th

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