The Optimal Price of Default
AbstractWith assets taken to be pools, rational expectations on their delivery rates are, as default is permissible in an economy and its penalty prescribed in terms of utility, indispensable to the existence of equilibrium. And the resulting equilibrium relies heavily on the prevailing penalty level. We propose, in this paper, a path-following algorithm for calculating the level of penalty that leads to a Pareto efficient equilibriumâ€”Pareto efficient among the set of equilibria of the economies with distinct penalty levels. This algorithm brings off those rational expectations by identifying their upper and lower bounds iteratively until the discrepancies between them are admissible.
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Bibliographic InfoArticle provided by Society for AEF in its journal Annals of Economics and Finance.
Volume (Year): 14 (2013)
Issue (Month): 1 (May)
Default; Penalty; Path-following; Pareto efficiency; Rational expectation;
Find related papers by JEL classification:
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
- D41 - Microeconomics - - Market Structure and Pricing - - - Perfect Competition
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
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