This paper develops a new quantitative theory of long-term unsecured credit contracts. Households can default and can switch credit lines. Banks can change the credit limit at any time, but must commit to the interest rate or not depending on the regulatory setting. Without commitment, the...

In this paper we produce a theory of partial default applicable to sovereign debt. The theory uses Markovian equilibria and the notion that circulating unpaid coupons of any given country courtail its productive capabilities. As a consequence no issues of equilibrium selection appear in the...