Real estate and optimal public policy in a credit-constrained economy

This paper articulates a general equilibrium model of a two-sector economy where entrepreneurs borrow from households subject to a credit constraint. Real estate is a productive factor in the entrepreneurial sector and serves as collateral in entrepreneurs' debt contracts. We consider two types of public policies that have the potential of improving upon the economy's equilibrium outcome, one of subsidizing entrepreneurial real estate holding and the other subsidizing household interest income. It is found that the former policy opens up a wide range of possibilities for Pareto improvement when the supply of real estate is endogenous.