Competitive Equilibria with Production and Limited Commitment
AbstractThis 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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Bibliographic InfoPaper provided by Stony Brook University, Department of Economics in its series Department of Economics Working Papers with number 10-04.
Date of creation: Oct 2010
Date of revision:
Enforcement Constraints; Intermediation; Risk Sharing; Capital Accumulation.;
Find related papers by JEL classification:
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-02-12 (All new papers)
- NEP-BAN-2011-02-12 (Banking)
- NEP-BEC-2011-02-12 (Business Economics)
- NEP-DGE-2011-02-12 (Dynamic General Equilibrium)
- NEP-MIC-2011-02-12 (Microeconomics)
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.:
- 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.
- Daniele Coen-Pirani, 2004. "Shareholders Unanimity With Incomplete Markets," 2004 Meeting Papers 479, Society for Economic Dynamics.
- Daniele Coen-Pirani & Eva Carceles-Poveda, . "Shareholders Unanimity With Incomplete Markets," GSIA Working Papers 2005-E13, Carnegie Mellon University, Tepper School of Business.
Blog mentionsAs found by EconAcademics.org, the blog aggregator for Economics research:
- Competitive Equilibria with Production and Limited Commitment
by Christian Zimmermann in NEP-DGE blog on 2011-02-13 20:44:14
- 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.
- Bauducco, Sofia & Caprioli, Francesco, 2014. "Optimal fiscal policy in a small open economy with limited commitment," Journal of International Economics, Elsevier, vol. 93(2), pages 302-315.
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