Pareto : improving default
Date
2010-05
Authors
Balasko, Yves
Kawamura, Enrique
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Journal Title
Journal ISSN
Volume Title
Publisher
Universidad de San Andrés. Departamento de Economía
Abstract
This paper answers the question of whether non-strategic default improves welfare, not
only for borrowers with uncertain future income but also for lenders with certain future
endowments, relative to no default. We show that the answer is a¢ rmative for a positive-
Lebesgue-measure set of individual endowments. Numerical computations show that the
size of such endowment set is larger the larger are both the risk aversion and the probability
of default. Other numerical examples show that with defaultable securities lenders may
nance the purchase of the latter by selling short default-free assets. This portfolio reminds
those of hedge-funds such as LTCM.
Description
Fil: Balasko, Yves. Universidad de San Andrés. Departamento de Economía; Argentina.
Fil: Kawamura, Enrique. Universidad de San Andrés. Departamento de Economía; Argentina.
Fil: Kawamura, Enrique. Universidad de San Andrés. Departamento de Economía; Argentina.