Incomplete Financial Markets With Real Assets and Endogenous Credit Limits
AbstractIn this paper we analyze the effects of restricted participation in a two-period gen- eral equilibrium model with uncertainty in the second period and real assets. Similar to certain arrangements in the market for bank loans, household borrowing is restricted by a household-specific wealth dependent upper bound on credit lines in all states of uncertainty in the second period. We first establish that, generically in the set of the economies, equilibria exist and are finite and regular. We then show that equilibria are generically suboptimal. Finally, we provide a robust example demonstrating that the equilibrium allocations can be Pareto improved through a tightening of the participation constraints.
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Bibliographic InfoPaper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1271.
Length: 40 pages
Date of creation: Jun 2012
Date of revision:
general equilibrium; restricted participation; financial markets; generic regularity; real assets; Pareto suboptimality;
Find related papers by JEL classification:
- D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
- D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-07-14 (All new papers)
- NEP-BAN-2012-07-14 (Banking)
- NEP-DGE-2012-07-14 (Dynamic General Equilibrium)
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