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Asset prices, debt constraints and inefficiency

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  • Gaetano Bloise
  • Pietro Reichlin

Abstract

In this paper, we consider economies with (possibly endogenous) solvency constraints under uncertainty. Constrained ine±ciency corresponds to a feasible redistribution yielding a welfare improvement beginning from ev- ery contingency reached by the economy. A sort of Cass Criterion (Cass [10]) completely characterizes constrained ine±ciency. This criterion involves only observable prices and requires low interest rates in the long-run, exactly as in economies with overlapping generations. In addition, when quantitative limits to liabilities arise from participation constraints, a feasible welfare im- provement, subject to participation, coincides with the introduced notion of constrained ine±ciency.

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Bibliographic Info

Paper provided by Department of Economics - University Roma Tre in its series Departmental Working Papers of Economics - University 'Roma Tre' with number 0089.

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Length: 29
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:rtr:wpaper:0089

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Keywords: Private debt; solvency constraints; default; Cass Criterion; asset;

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References

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Cited by:
  1. Jürgen Eichberger & Klaus Rheinberger & Martin Summer, 2014. "Credit Risk in General Equilibrium," CESifo Working Paper Series 4602, CESifo Group Munich.
  2. Stefano Bosi & Cuong Le Van & Ngoc-Sang Pham, 2014. "Intertemporal equilibrium with production: bubbles and efficiency," Working Papers 2014-306, Department of Research, Ipag Business School.
  3. Gaetano Bloise & Pietro Reichlin & Mario Tirelli, 2009. "Indeterminacy of competitive equilibrium with risk of default," Departmental Working Papers of Economics - University 'Roma Tre' 0109, Department of Economics - University Roma Tre.
  4. Robert A. Becker & Tapan Mitra, 2011. "Efficient Ramsey Equilbria," Caepr Working Papers 2011-009, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  5. Bidian, Florin & Bejan, Camelia, 2011. "Martingale properties of self-enforcing debt," MPRA Paper 36609, University Library of Munich, Germany, revised 12 Feb 2012.

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