In a model with capital accumulation, aggregate risk and competitive intermediaries, Abraham and Carceles-Poveda (2006) show that the constrained efficient allocations can be decentralized as a competitive equilibrium with endogenous borrowing limits if one also imposes an upper limit on the...

We study the effect of a borrowing limit on aggregate welfare in the context of an incomplete markets economy a la Aiyagari anf Huggett. We show that a larger borrowing limit is not necessarily welfare-improving.