Three essays on savings and the term structure of lending
Vargas, Hernando
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https://hdl.handle.net/2142/23433
Description
Title
Three essays on savings and the term structure of lending
Author(s)
Vargas, Hernando
Issue Date
1994
Doctoral Committee Chair(s)
Villamil, Anne P.
Department of Study
Economics
Discipline
Economics
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Economics, General
Economics, Finance
Economics, Theory
Language
eng
Abstract
This dissertation explores two subjects. The first one is the relationship between low liquidity in secondary markets for capital and the insufficient supply of long term funding for productive investment. The first chapter shows how shallow or non-existent secondary markets for capital can induce a short term bias in lending, a problem observed in developing countries. A general equilibrium model is developed with government debt and private capital that is costly to trade. The transaction costs reduce the proportion of savings held as capital. Three main results are established. First, larger government deficits cause a greater proportion of savings to be held as debt. Second, deficit finance alternatives (taxes vs. debt) have different effects on investment. And third, a rationale is provided for why intermediation occurs when capital trading is costly.
The second subject studied in this dissertation is the effect of incomplete insurance on individual savings. The second chapter compares a two-period-lived, risk-averse agent's optimal consumption decision under complete and incomplete markets in the presence of labor income uncertainty. Initially, markets are completed by Arrow-Debreu securities and a risk-free asset. Then, the market for a contingent claim is closed, and the change in the individual's current consumption is examined, assuming that the prices of the remaining assets are constant. Two results are derived. First, the change in the risk-free asset position is a non-negative fraction of the insurance lost when a contingent claim market is eliminated. Second, if the utility function exhibits constant absolute risk aversion, savings increase whenever an insurance market is removed. If the utility function displays constant relative risk aversion and under complete markets high consumption states are associated with negative insurance, or low consumption states with positive insurance, then the elimination of one contingent claim market increases savings. The third chapter extends some of these results to situations in which markets are initially incomplete, and then a contingent claim market is removed.
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