A macroeconomic model with endogenous credit constraints due to a moral hazard problem in lending is developed. There are two sequential borrowing decisions; first, an agent may wish to borrow to become educated and secondly, an educated agent may wish to borrow to become an entrepreneur. The...

This paper reviews arguments for and against the central government controlling local government expenditure of macroeconomic purposes.

This paper develops a two-period overlapping generations model where agents choose whether to become educated when young. While education enhances productivity, it needs to be financed by borrowing. Because of the possibility of default, lenders may ration credit. We characterize the...