We present a model of long-duration collateralized debt with risk of default. Applied to the housing market, it can match the homeownership rate, the average foreclosure rate, and the lower tail of the distribution of home-equity ratios across homeowners prior to the recent crisis. We stress the...

This paper is superseded by WP 15-15 <p>The authors construct a quantitative equilibrium model of the housing market in which an unanticipated increase in the supply of housing triggers default mortgages via its effect on house prices. The decline in house prices creates an incentive to increase...</p>

The authors construct a quantitative equilibrium model of the housing sector that accounts for the homeownership rate, the average foreclosure rate, and the distribution of home-equity ratios across homeowners prior to the recent boom and bust in the housing market. They analyze the key...

In this paper, the authors advance the theory and computation of Eaton-Gersovitz style models of sovereign debt by incorporating long-term debt and proving the existence of an equilibrium price function with the property that the interest rate on debt is increasing in the amount borrowed and...

Restriction on the supply of new urban land is commonly thought to raise the value of existing urban land. Our paper questions this view. We develop a tractable production-externality-based circular city model in which firms and workers choose locations and intensity of land use. Consistent with...

We prove that the standard quasi-geometric discounting model used in dynamic consumer theory and political economics does not possess continuous Markov perfect equilibria (MPE) if there is a strictly positive lower bound on wealth. We also show that, at points of discontinuity, the decision...

A sovereign's inability to commit to a course of action regarding future borrowing and default behavior makes long-term debt costly (the problem of debt dilution). One mechanism to mitigate the debt dilution problem is the inclusion of a seniority clause in sovereign debt contracts. In the event...

Superseded by working paper 13-37. A tractable production-externality-based circular city model in which both firms and workers choose location as well as intensity of land use is presented. The equilibrium structure of the city has either (i) no commuting ("mixed-use" form) or (ii) a central...

An important source of inefficiency in long-term debt contracts is the debt dilution problem, wherein a borrower ignores the adverse impact of new borrowing on the market value of outstanding debt and, therefore, borrows too much and defaults too frequently. A commonly proposed remedy to the...

An important ineffciency in sovereign debt markets is debt dilution, wherein sovereigns ignore the adverse impact of new debt on the value of existing debt and, consequently, borrow too much and default too frequently. A widely proposed remedy is the inclusion of seniority clause in sovereign...