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A Credit Mechanism for Selecting a Unique Competitive Equilibrium

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Abstract

The enlargement of the general-equilibrium structure to allow default subject to penalties to appririate credit limits and default penalties results in a construction of a simple mechanism for a credit using society. We show that there generically exists a price-normalizing bundle that determines a credit money along with appropriate credit limits and default penalties for a credit mechanism to select a unique competitive equilibrium (CE). With some additional conditions, a common credit money can be applied such that any CE can be a unique selection by the credit mechanism with appropriate credit limits default penalties for the traders. This will include a CE with the minimal cash flow penalty. Such CEs are special for the reason that we minimize the need for a substitute-for-trust (i.e. money) in trade.

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File URL: http://cowles.econ.yale.edu/P/cd/d15a/d1539-r.pdf
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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1539R.

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Length: 21 pages
Date of creation: Oct 2005
Date of revision: Jun 2009
Handle: RePEc:cwl:cwldpp:1539r

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Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA

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Keywords: Competitive equilibrium; Credit mechanism; Marginal utility of income; Welfare economics;

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  1. Martin Shubik, 2000. "The Theory of Money," Cowles Foundation Discussion Papers 1253, Cowles Foundation for Research in Economics, Yale University.
  2. Billera, Louis J., 1974. "On games without side payments arising from a general class of markets," Journal of Mathematical Economics, Elsevier, vol. 1(2), pages 129-139, August.
  3. Shapley, Lloyd S & Shubik, Martin, 1977. "An Example of a Trading Economy with Three Competitive Equilibria," Journal of Political Economy, University of Chicago Press, vol. 85(4), pages 873-75, August.
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Cited by:
  1. Juergen Huber & Martin Shubik & Shyam Sunder, 2009. "Default Penalty as a Disciplinary and Selection Mechanism in Presence of Multiple Equilibria," Cowles Foundation Discussion Papers 1730, Cowles Foundation for Research in Economics, Yale University.
  2. Chen-Zhong Qin & Lloyd S. Shapley & Martin Shubik, 2009. "Marshallian Money, Welfare, and Side-Payments," Cowles Foundation Discussion Papers 1729, Cowles Foundation for Research in Economics, Yale University.

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