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Competitive Equilibria with Production and Limited Commitment

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Author Info

  • Arpad Abraham

    () (Department of Economics, University of Rochester)

  • Eva Carceles-Poveda

    () (Department of Economics, Stony Brook University)

Abstract

This paper studies a production economy with aggregate uncertainty where consumers have limited commitment on their financial liabilities. Markets are endogenously incomplete due to the fact that the borrowing constraints are determined endogenously. We first show that, if competitive financial intermediaries are allowed to set the borrowing limits, then the ones that prevent default will be an equilibrium outcome. The equilibrium allocations in this economy are not constrained efficient due to the fact that intermediaries do not internalize the adverse effects of capital on default incentives. We also isolate and quantifiy this new source of inefficiency by comparing the competitive equilibrium allocations to the constrained efficient ones both qualitatively and quantitatively. We tend to observe higher capital accumulation in the competitive equilibrium, implying that agents may enjoy higher (average) welfare in the long run than in the constrained efficient allocation.

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File URL: http://www.stonybrook.edu/economics/research/papers/2010/risksharing.pdf
File Function: First version, 2010
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Bibliographic Info

Paper provided by Stony Brook University, Department of Economics in its series Department of Economics Working Papers with number 10-04.

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Date of creation: Oct 2010
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Handle: RePEc:nys:sunysb:10-04

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Related research

Keywords: Enforcement Constraints; Intermediation; Risk Sharing; Capital Accumulation.;

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References

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  1. Eva Carceles-Poveda & Daniele Coen-Pirani, 2009. "Shareholders' Unanimity With Incomplete Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(2), pages 577-606, 05.
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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. Competitive Equilibria with Production and Limited Commitment
    by Christian Zimmermann in NEP-DGE blog on 2011-02-13 20:44:14
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Cited by:
  1. 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.

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