Borrowing Constraints

Hard times have hit Ephraim, Utah, thanks to the collapse of the local bank, destroyed after a cashier embezzled $5 million and a polygamist Mormon sect defaulted on a pile of loans. For years, the Bank of Ephraim profited by providing the sect high-interest loans on a series of dicey operations, such as a watermelon farm with no melon plants. Unbeknown to bank managers, members of the fundamentalist sect had vowed to borrow as much money as possible to prepare for the end of the world. The sect's reclusive leader, Warren Jeffs, takes a share of members' business profits. He is buying ranches in Colorado and Texas; authorities believe he may be planning a getaway. Wired.com

Polygamy, fugitive and watermelons. What's there not to like... Interestingly enough, this little reflects a little thorn in the side of economists known as the final period problem. Specifically, before The-Final-Period, when you're going to DIE, you will paa-rty-like-craa-zy. In order to party-like-crazy, you will borrow-like-crazy. Well, since everyone is doing this, and everyone knows everyone's doing this, no one will lend to you. This also has side-effect that no one will trade with you, and also, that you CANNOT party-like-crazy.

So how do we fix it? We put in borrowing constraints, which have the unintuitive result that they only bind on rich people... why? cuz when you're rich, you can run away with everything you've borrowed cuz you never ever have to borrow again.

There are other fixes that can be done, but it's always hanging ominously in the background.

And so that's why we use assumptions! "What problem? There is no problem. PARTY TIME"