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Efficiency and the Role of Default When Security Markets Are Incomplete

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  • Zame, William R

Abstract

This paper argues that default plays an important positive role in the economy. If markets are incomplete and traders are only able to enter into contracts that they will be able to execute regardless of future events, contingent contracting may be severely restricted. Moreover, opening new markets may not relieve these restrictions. Default promotes efficiency in a way that opening new markets does not by making it possible for traders to enter into contracts that they will be able to execute with high probability but not with certainty. Copyright 1993 by American Economic Association.

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 83 (1993)
Issue (Month): 5 (December)
Pages: 1142-64

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Handle: RePEc:aea:aecrev:v:83:y:1993:i:5:p:1142-64

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  1. David K. Levine & William Zame, 1996. "Debt Constraints and Equilibrium in Infinite Horizon Economies with Incomplete Markets," Levine's Working Paper Archive 1954, David K. Levine.
  2. Reinhard Selten, 1974. "Reexamination of the Perfectness Concept for Equilibrium Points in Extensive Games," Working Papers 023, Bielefeld University, Center for Mathematical Economics.
  3. Werner, Jan, 1985. "Equilibrium in economies with incomplete financial markets," Journal of Economic Theory, Elsevier, vol. 36(1), pages 110-119, June.
  4. David Cass, 2006. "Competitive Equilibrium with Incomplete Financial Markets," PIER Working Paper Archive 06-010, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  5. Oliver Hart & John Moore, 1998. "Default And Renegotiation: A Dynamic Model Of Debt," The Quarterly Journal of Economics, MIT Press, vol. 113(1), pages 1-41, February.
  6. Timothy J Kehoe & David K Levine, 1993. "Debt Constrained Asset Markets," Levine's Working Paper Archive 1276, David K. Levine.
  7. John Geanakoplos & Pradeep Dubey, 1989. "Liquidity and Bankruptcy with Incomplete Markets: Pure Exchange," Cowles Foundation Discussion Papers 900, Cowles Foundation for Research in Economics, Yale University.
  8. Duffie, Darrell & Shafer, Wayne, 1985. "Equilibrium in incomplete markets: I : A basic model of generic existence," Journal of Mathematical Economics, Elsevier, vol. 14(3), pages 285-300, June.
  9. Radner, Roy, 1972. "Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of Markets," Econometrica, Econometric Society, vol. 40(2), pages 289-303, March.
  10. Donald J. Brown & Charalambos Aliprantis & Owen Burkinshaw, 1985. "Edgeworth Equilibria," Cowles Foundation Discussion Papers 756R, Cowles Foundation for Research in Economics, Yale University.
    • Aliprantis, Charalambos D & Brown, Donald J & Burkinshaw, Owen, 1987. "Edgeworth Equilibria," Econometrica, Econometric Society, vol. 55(5), pages 1109-37, September.
  11. Stiglitz, Joseph E, 1982. "The Inefficiency of the Stock Market Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 241-61, April.
  12. Pradeep Dubey & John Geanakoplos & Martin Shubik, 1988. "Default and Efficiency in a General Equilibrium Model with Incomplete Markets," Cowles Foundation Discussion Papers 879R, Cowles Foundation for Research in Economics, Yale University, revised Feb 1989.
  13. Bewley, Truman F., 1972. "Existence of equilibria in economies with infinitely many commodities," Journal of Economic Theory, Elsevier, vol. 4(3), pages 514-540, June.
  14. Zame,William, 1988. "Asymptotic behaviour or asset markets,I: Asymptotic inefficience," Discussion Paper Serie A 220, University of Bonn, Germany.
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