termination via prepayment or default affects optimal risk-sharing. The broad conclusion of the analysis is that potential … of optimal risk-sharing in mortgage contracts. But since only a small literature has studied this question, more research … mortgage termination makes higher risk exposure for borrowers optimal. …

In the presence of uninsurable idiosyncratic risk, the optimal credit contract allows for the possibility of default … save. When default is sufficiently high, credit markets may collapse. A regulatory requirement on the level of savings can … increase risk sharing and improve welfare by increasing the gains to trade in credit exchange. Under the appropriate …