Trading Constraints Penalizing Default : A Recursive Approach

This paper presents trading constraints as an intertemporal penalty for default. It models an infinite-horizon economy with incomplete markets, where agents are allowed to not pay their liabilities and have financial trades restricted according to their history of default. Those constraints balance the economy's risk-sharing possibilities and repayment incentives. The equilibrium presents stationary properties, such as an invariant distribution for assets' solvency rates