Endogenous incomplete markets, enforcement constraints, and intermediation
AbstractAlvarez and Jermann (2000) show that the constrained efficient allocations of endowment economies with imperfect risk sharing due to limited commitment can be decentralized as competitive equilibria with endogenous debt constraints that are not too tight. These are the loosest possible borrowing limits that do not allow for default in equilibrium. However, such a decentralization is not possible in the presence of capital accumulation, since changes in the aggregate capital also affect the incentives to default. In a model with endogenous production, aggregate risk, and competitive intermediaries, we show that a decentralization with endogenous debt constraints is possible if one also imposes an upper limit on the intermediaries’ capital holdings.
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Bibliographic InfoArticle provided by Econometric Society in its journal Theoretical Economics.
Volume (Year): 1 (2006)
Issue (Month): 4 (December)
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Web page: http://econtheory.org
Complete markets; enforcement constraints; intermediation;
Find related papers by JEL classification:
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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