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Unawareness and bankruptcy: A general equilibrium model

Author

Listed:
  • Salvatore Modica

    (Universita` di Palermo, IMRO, I-98121 Palermo, ITALY)

  • J.-Marc Tallon

    (CNRS-MAD, Université Paris I, F-75634 Paris Cedex 13, FRANCE)

  • Aldo Rustichini

    (CentER, Tilburg University, P.O. Box 90153, NL-5000 LE Tilburg, THE NETHERLANDS)

Abstract

We present a consistent pure-exchange general equilibrium model where agents may not be able to foresee all possible future contingencies. In this context, even with nominal assets and complete asset markets, an equilibrium may not exist without appropriate assumptions. Specific examples are provided. An existence result is proved under the main assumption that there are sufficiently many states that all the agents foresee. An intrinsic feature of the model is bankruptcy, which agents may involuntarily experience in the unforeseen states.

Suggested Citation

  • Salvatore Modica & J.-Marc Tallon & Aldo Rustichini, 1998. "Unawareness and bankruptcy: A general equilibrium model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(2), pages 259-292.
  • Handle: RePEc:spr:joecth:v:12:y:1998:i:2:p:259-292
    Note: Received: April 23, 1997; revised version: May 19, 1997
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    Citations

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    Cited by:

    1. Spyros Galanis, 2013. "Unawareness of theorems," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 52(1), pages 41-73, January.
    2. Jürgen Eichberger & Klaus Rheinberger & Martin Summer, 2014. "Credit risk in general equilibrium," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(2), pages 407-435, October.
    3. Aloisio Araujo, 2002. "As Leis de Falência: uma Abordagem Econômica," Working Papers Series 57, Central Bank of Brazil, Research Department.
    4. repec:onb:oenbwp:y::i:172:b:1 is not listed on IDEAS
    5. Filiz-Ozbay, Emel, 2012. "Incorporating unawareness into contract theory," Games and Economic Behavior, Elsevier, vol. 76(1), pages 181-194.
    6. Ying-Ju Chen & Xiaojian Zhao, 2013. "Solution Concepts of Principal-Agent Models with Unawareness of Actions," Games, MDPI, Open Access Journal, vol. 4(3), pages 1-24, August.
    7. Sarah Auster, 2011. "Asymmetric Awareness and Moral Hazard," Economics Working Papers ECO2011/, European University Institute.
    8. Liu, Zhen, 2006. "Fair Disclosure and Investor Asymmetric Awareness in Stock Markets," MPRA Paper 917, University Library of Munich, Germany.
    9. Andrés Carvajal & Alvaro Riascos, 2006. "Belief Non-Equivalence And Financial Trade: A Comment On A Result By Araujo And Sandroni," DOCUMENTOS CEDE 002062, UNIVERSIDAD DE LOS ANDES-CEDE.
    10. Spyros Galanis, 2011. "Syntactic foundations for unawareness of theorems," Theory and Decision, Springer, vol. 71(4), pages 593-614, October.
    11. Jürgen Eichberger & Klaus Rheinberger & Martin Summer, 2014. "Credit risk in general equilibrium," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 57(2), pages 407-435, October.
    12. Li Gan & Tarun Sabarwal, 2005. "A Simple Test of Adverse Events and Strategic Timing Theories of Consumer Bankruptcy," NBER Working Papers 11763, National Bureau of Economic Research, Inc.
    13. Peiris, M. Udara & Tsomocos, Dimitrios P., 2015. "International monetary equilibrium with default," Journal of Mathematical Economics, Elsevier, vol. 56(C), pages 47-57.
    14. Auster, Sarah, 2013. "Asymmetric awareness and moral hazard," Games and Economic Behavior, Elsevier, vol. 82(C), pages 503-521.
    15. Hadjikhani, Amjad & Hadjikhani, Annoch Isa & Thilenius, Peter, 2014. "The internationalization process model: A proposed view of firms’ regular incremental and irregular non-incremental behaviour," International Business Review, Elsevier, vol. 23(1), pages 155-168.
    16. Sarah Auster, 2012. "Asymmetric Awareness and Moral Hazard," Economics Working Papers ECO2012/23, European University Institute.
    17. Tarun Sabarwal, 2000. "Welfare Effects of Bankruptcy," Levine's Working Paper Archive 1980, David K. Levine.
    18. Francesco Squintani, 1999. "Games with Small Forgetfulness," Discussion Papers 1273, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

    More about this item

    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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