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Endogenous incomplete markets, enforcement constraints, and intermediation

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  • Abraham, Arpad

    ()
    (University of Rochester)

  • Carceles-Poveda, Eva

    ()
    (SUNY Stony Brook)

Abstract

Alvarez 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 Info

Article provided by Econometric Society in its journal Theoretical Economics.

Volume (Year): 1 (2006)
Issue (Month): 4 (December)
Pages: 439-459

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Handle: RePEc:the:publsh:204

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Web page: http://econtheory.org

Related research

Keywords: Complete markets; enforcement constraints; intermediation;

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Cited by:
  1. Krueger, Dirk & Perri, Fabrizio, 2010. "Public versus Private Risk Sharing," CEPR Discussion Papers 7625, C.E.P.R. Discussion Papers.
  2. Sofia Bauducco & Francesco Caprioli, 2011. "Optimal Fiscal Policy in a Small Open Economy with Limited Commitment," Working Papers Central Bank of Chile 644, Central Bank of Chile.
  3. Josef Schroth, 2012. "Financial Crisis Resolution," Working Papers 12-42, Bank of Canada.
  4. Josef Schroth, 2012. "Financial Crisis Resolution," 2012 Meeting Papers 617, Society for Economic Dynamics.
  5. Yena Park, 2012. "Optimal Taxation in a Limited Commitment Economy," PIER Working Paper Archive 12-033, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.

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