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Existence and Non-Triviality of Equilibria in Economies with Default and Government

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  • Orrillo, Jaime
  • Filho, Jolive de Santana Filho

Abstract

This paper attempts to accommodate the government into Dubey, Geanakoplos and Shubik (2005) framework in an explicit way, and proves that a non-trivial equilibrium exists. By non-trivial equilibrium, we mean an equilibrium where there exists trading in the financial markets and some private borrower defaults. The government, characterised by its spending and tax plans\footnote{Both are assumed to be exogenous like in Gale (1990).}, enters our economic model by trading financial assets in order to balance its budget. Proof of existence is made by considering a generalised game \`a la Debreu (1952)\footnote{Already well known in the GEI literature.}, and its non-triviality is obtained by using the non-differentiable optimisation theory.

Suggested Citation

  • Orrillo, Jaime & Filho, Jolive de Santana Filho, 2020. "Existence and Non-Triviality of Equilibria in Economies with Default and Government," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 39(2), March.
    • Handle: RePEc:sbe:breart:v:39:y:2020:i:2:a:78570
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    1. Geanakoplos, J. & Polemarchakis, H., 1985. "Existence,regularity, and constrained suboptimality of competitive allocations when the asset market is incomplete," LIDAM Discussion Papers CORE 1985037, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Timothy J. Kehoe & David K. Levine, 1993. "Debt-Constrained Asset Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(4), pages 865-888.
    3. Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December.
    4. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-598, May.
    5. Maldonado, Wilfredo L. & Orrillo, Jaime, 2006. "Two-Sided Altruism in an OLG Model with Incomplete Markets and Default," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 26(2), November.
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