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Competitive equilibria with limited enforcement

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  • Patrick J. Kehoe
  • Fabrizio Perri

Abstract

Previous literature has shown that the study and characterization of constrained efficient allocations in economies with limited enforcement is useful to understand the limited risk sharing observed in many contexts, in particular between sovereign countries. In this paper we show that these constrained efficient allocations arise as equilibria in an economy in which private agents behave competitively, taking as given a set of taxes. We then show that these taxes, which end up limiting risk sharing, arise as an equilibrium of a dynamic game between governments. Our decentralization is different from the existing ones proposed in the literature. We find it intuitively appealing and we think it goes farther than the existing literature in endogenizing the primitive forces that lead to a lack of risk sharing in equilibrium. (Replaced by Staff Report No: 307)

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 621.

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Date of creation: 2002
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Handle: RePEc:fip:fedmwp:621

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Keywords: Equilibrium (Economics) ; Credit ; International trade;

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  1. Marianne Baxter & Mario J. Crucini, 1992. "Business cycles and the asset structure of foreign trade," Discussion Paper / Institute for Empirical Macroeconomics 59, Federal Reserve Bank of Minneapolis.
  2. Narayana Kocherlakota, 2010. "Implications of Efficient Risk Sharing Without Commitment," Levine's Working Paper Archive 2053, David K. Levine.
  3. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-96, March.
  4. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
  5. V.V. Chari & Patrick J. Kehoe, 1989. "Sustainable plans," Staff Report 122, Federal Reserve Bank of Minneapolis.
  6. Mark L. J. Wright, 2004. "Private capital flows, capital controls, and default risk," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  7. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-98, May.
  8. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1991. "International real business cycles," Staff Report 146, Federal Reserve Bank of Minneapolis.
  9. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 2002. "Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies," Review of Economic Studies, Oxford University Press, vol. 69(1), pages 209-244.
  10. V. V. Chari & Patrick E. Kehoe, 1990. "Sustainable Plans and Mutual Default," IMF Working Papers 90/22, International Monetary Fund.
  11. Kenneth M. Kletzer & Brian D. Wright, 2000. "Sovereign Debt as Intertemporal Barter," International Finance 0003004, EconWPA.
  12. Timothy J Kehoe & David K Levine, 1993. "Debt Constrained Asset Markets," Levine's Working Paper Archive 1276, David K. Levine.
  13. Juha Seppala, 2000. "Asset Prices And Business Cycles Under Limited Commitment," Computing in Economics and Finance 2000 319, Society for Computational Economics.
  14. Patrick J. Kehoe & Fabrizio Perri, 2002. "International Business Cycles with Endogenous Incomplete Markets," Econometrica, Econometric Society, vol. 70(3), pages 907-928, May.
  15. Karsten Jeske, 2005. "Private international debt with risk of repudiation," Working Paper 2001-16, Federal Reserve Bank of Atlanta.
  16. 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.
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