CREDIT AND GROWTH UNDER LIMITED COMMITMENT

We consider a linear growth model with idiosyncratic productivity shocks in whichproducers cannot commit to repay their loans. Borrowing constraints are determinedendogenously by the borrowers’ incentives to repay, assuming that defaulters lose a shareof output and are excluded from future trade in the credit market. We characterizenecessary and sufficient conditions for the enforceability of a first-best equilibrium growthpath. Weak property rights, impatient producers, and small productivity differentials canmake the efficient growth path nonenforceable and lead to an inefficient equilibrium withbinding borrowing constraints. For some economies, multiple balanced growth pathscoexist.[...]