Risk-sharing in heterogenous agent models with incomplete markets.
This thesis examines the impact of different risk sharing arrangements under incomplete financial markets on macroeconomic outcomes. The first two chapters are joint work with Giacomo Rodano. In the first chapter, we examine the effects of Chapter 7 of the US bankruptcy law on entrepreneurs. The latter are subject to production risk. They can borrow and in case they fail they can default on their debt. We examine the optimal wealth exemption level and the optimal credit market exclusion duration in this environment. In addition to unsecured credit, entrepreneurs can also obtain secured credit in the second chapter. Secured credit lowers the cost of a generous bankruptcy regime because agents who are rationed out of the unsecured credit market can still obtain secured credit. Therefore, the optimal exemption level is relatively high. In the third chapter, I investigate the effects of wealth exemptions on interest rates if entrepreneurs can choose the riskiness of their project. The default possibility leads to a kink in the value function which makes agents locally risk-loving. In the fourth chapter, I focus on consumers only. In particular, I show that wealth exemptions are of particular importance in a model with expense shocks. Wealth exemptions encourage people to save more so that aggregate savings rise. The model is also consistent with the fact that consumer bankruptcy cases are not correlated with wealth exemption levels. The fifth chapter is joint work with Rigas Oikonomou. We compare two environments: on the one hand the standard one in which a household consists of one member and, on the other hand, one in which a household consists of two members who share their risks perfectly. We investigate the differences between the two models in labor market flows and volatilities of labor market statistics in response to productivity shocks.