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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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    2. 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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    4. 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.
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