Suppose that there is limited commitment in the credit market, but lenders are uncertain about the value of collateral. Each consumer has a quantity of collateral H but from the point of view of the lender, there is a probability a that the collateral will be worth p in the future period and probability 1- a that the collateral will be worthless in the future period. Suppose that all consumers are identical. (Note there are good and bad borrowers) (a) Determine the collateral constraint for the consumer and show the consumer's lifetime budget constraint in a diagram. (b) How will a decrease in a affect the consumer's consumption and savings in the current period, and consumption in the future period? Explain your results.

Suppose that there is limited commitment in the credit market, but lenders are uncertain about the value of collateral. Each consumer has a quantity of collateral H but from the point of view of the lender, there is a probability a that the collateral will be worth p in the future period and probability 1- a that the collateral will be worthless in the future period. Suppose that all consumers are identical. (Note there are good and bad borrowers) (a) Determine the collateral constraint for the consumer and show the consumer's lifetime budget constraint in a diagram. (b) How will a decrease in a affect the consumer's consumption and savings in the current period, and consumption in the future period? Explain your results.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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