We study efficient exclusion policies in a canonical credit model that features both exogenous and strategic default along the equilibrium path. Policies that maximize welfare in a stationary equilibrium implement exclusion for a finite and deterministic number of periods following default. Front-loading exclusion makes the mass of socially valuable transactions as high as it can be in steady state. Less intuitively, doing so also maximizes the average welfare of excluded agents in equilibrium conditional on the level of incentives provided by the threat of exclusion. We argue that these results are robust to a host of natural variations on our benchmark model.
Monnet, Cyril, and Erwan Quintin.
"Optimal Financial Exclusion."
American Economic Journal: Microeconomics,
Stochastic and Dynamic Games; Evolutionary Games; Repeated Games
General Equilibrium and Disequilibrium: Financial Markets
Economics of Contract: Theory
Banks; Depository Institutions; Micro Finance Institutions; Mortgages
Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
Household Finance: Household Saving, Borrowing, Debt, and Wealth