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The structure of competitive equilibrium with unsecured debt

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  • Gaetano Bloise
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    Abstract

    I provide a complete characterization of equilibrium with risk of default in sequential economies under uncertainty. Default induces permanent exclusion from financial markets and not-too-tight solvency constraints prevent debt repudiation at equilibrium. The method of analysis relies on a recursive planning program along with the theory of monotone concave opera- tors. The reputational mechanism is fragile, as it sustains constrained efficient as well as constrained inefficient equilibria. Constrained inefficient equilibria involve a progressive deterioration of reputation, inducing a collapse of fi nancial markets with positive probability. Importantly, the only ergodic recursive equilibria (involving trade) are constrained efficient.

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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 0187.

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    Date of creation: Dec 2013
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    Handle: RePEc:rtr:wpaper:0187

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    Keywords: Limited commitment; solvency constraints; competitive equilib- rium; constrained eciency; dynamic programming; monotone concave oper- ator.;

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    10. Benhabib, Jess & Rustichini, Aldo, 1996. " Social Conflict and Growth," Journal of Economic Growth, Springer, vol. 1(1), pages 125-42, March.
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    12. Gaetano Bloise & Pietro Reichlin & Mario Tirelli, 2013. "Fragility of Competitive Equilibrium with Risk of Default," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(2), pages 271-295, April.
    13. Christian Hellwig & Guido Lorenzoni, 2006. "Bubbles and Self-Enforcing Debt," NBER Working Papers 12614, National Bureau of Economic Research, Inc.
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    18. repec:hal:wpaper:hal-00294828 is not listed on IDEAS
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