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Competitive equilibria with limited enforcement

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Author Info
Patrick J. Kehoe
Fabrizio Perri

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Abstract

We show how to decentralize constrained efficient allocations that arise from enforcement constraints between sovereign nations. In a pure exchange economy, these allocations can be decentralized with private agents acting competitively and taking as given government default decisions on foreign debt. In an economy with capital, these allocations can be decentralized if the government can tax capital income as well as default on foreign debt. The tax on capital income is needed to make private agents internalize a subtle externality. The decisions of the government can arise as an equilibrium of a dynamic game between governments.

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Publisher Info
Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 307.

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Date of creation: 2003
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Publication status: Published in Journal of Economic Theory (Vol. 119, No. 1, November 2004, pp. 184-206)
Handle: RePEc:fip:fedmsr:307

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Keywords: Equilibrium (Economics) ; Competition ; Econometric models;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Blackwell Publishing, vol. 48(2), pages 289-309, April. [Downloadable!] (restricted)
  2. Chari, V V & Kehoe, Patrick J, 1993. "Sustainable Plans and Mutual Default," Review of Economic Studies, Blackwell Publishing, vol. 60(1), pages 175-95, January. [Downloadable!] (restricted)
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  3. Kehoe, Timothy J & Levine, David K, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Blackwell Publishing, vol. 60(4), pages 865-88, October. [Downloadable!] (restricted)
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  4. Juha Seppala, 2000. "Asset Prices And Business Cycles Under Limited Commitment," Computing in Economics and Finance 2000 319, Society for Computational Economics.
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  5. Karsten Jeske, 2005. "Private international debt with risk of repudiation," Working Paper 2001-16, Federal Reserve Bank of Atlanta. [Downloadable!]
  6. Chari, V V & Kehoe, Patrick J, 1990. "Sustainable Plans," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 783-802, August. [Downloadable!] (restricted)
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  7. Attanasio, Orazio & Rios-Rull, Jose-Victor, 2000. "Consumption smoothing in island economies: Can public insurance reduce welfare?," European Economic Review, Elsevier, vol. 44(7), pages 1225-1258, June. [Downloadable!] (restricted)
  8. Ligon, Ethan & Thomas, Jonathan P & Worrall, Tim, 2002. "Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies," Review of Economic Studies, Blackwell Publishing, vol. 69(1), pages 209-44, January.
  9. Backus, David K & Kehoe, Patrick J & Kydland, Finn E, 1992. "International Real Business Cycles," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 745-75, August. [Downloadable!] (restricted)
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  10. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-98, May.
  11. Kocherlakota, Narayana R, 1996. "Implications of Efficient Risk Sharing without Commitment," Review of Economic Studies, Blackwell Publishing, vol. 63(4), pages 595-609, October. [Downloadable!] (restricted)
  12. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-96, March. [Downloadable!] (restricted)
  13. Kenneth M. Kletzer & Brian D. Wright, 2000. "Sovereign Debt as Intertemporal Barter," American Economic Review, American Economic Association, vol. 90(3), pages 621-639, June. [Downloadable!] (restricted)
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  14. Baxter, Marianne & Crucini, Mario J, 1995. "Business Cycles and the Asset Structure of Foreign Trade," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 36(4), pages 821-54, November. [Downloadable!] (restricted)
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  15. Mark L. J. Wright, 2004. "Private capital flows, capital controls, and default risk," Proceedings, Federal Reserve Bank of San Francisco, issue Jun. [Downloadable!]
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  16. Patrick J. Kehoe & Fabrizio Perri, 2002. "International Business Cycles with Endogenous Incomplete Markets," Econometrica, Econometric Society, vol. 70(3), pages 907-928, May. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Drew Saunders, 2007. "Sharing Risk Efficiently under Suboptimal Punishments for Defection," Purdue University Economics Working Papers 1203, Purdue University, Department of Economics. [Downloadable!]
  2. Bernardo Guimaraes, 2008. "Optimal External Debt and Default," CEP Discussion Papers dp0847, Centre for Economic Performance, LSE. [Downloadable!]
    Other versions:
  3. Almuth Scholl, 2002. "Limited Enforceable International Loans, International Risk Sharing and Trade," SFB 649 Discussion Papers SFB649DP2005-055, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany, revised Aug 2005. [Downloadable!]
  4. Arpad Abraham & Eva Carceles-Poveda, 2006. "Complete Markets, Enforcement Constraints and Intermediation," Computing in Economics and Finance 2006 320, Society for Computational Economics. [Downloadable!]
    Other versions:
  5. Pablo A. Neumeyer & Fabrizio Perri, 2004. "Business cycles in emerging economies: the role of interest rates," Staff Report 335, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
  6. Jaume Ventura & Fernando A. Broner, 2006. "Globalization and Risk Sharing," NBER Working Papers 12482, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  7. Mark L . J. Wright, 2004. "Private capital flows, capital controls, and default risk," Pacific Basin Working Paper Series 2004-34, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  8. Gao, Xiang, 2009. "Private Debt with Pervasive Default Risk," MPRA Paper 17126, University Library of Munich, Germany, revised 04 Nov 2009. [Downloadable!]
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