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Efficiency and the Role of Default When Security Markets are Incomplete

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  • William R. Zame

    (UCLA)

Abstract

This paper argues that default plays an important positive role in the economy. If markets are incomplete and traders are only able to enter into contracts that they will be able to execute regardless of future events, contingent contracting may be severely restricted. Moreover, opening new markets may not relieve these restrictions. Default promotes efficiency in a way that opening new markets does not by making it possible for traders to enter into contracts that they will be able to execute with high probability but not with certainty. Copyright 1993 by American Economic Association.
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Suggested Citation

  • William R. Zame, 1990. "Efficiency and the Role of Default When Security Markets are Incomplete," UCLA Economics Working Papers 585, UCLA Department of Economics.
  • Handle: RePEc:cla:uclawp:585
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    File URL: http://www.econ.ucla.edu/workingpapers/wp585.pdf
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    References listed on IDEAS

    as
    1. Oliver Hart & John Moore, 1998. "Default and Renegotiation: A Dynamic Model of Debt," The Quarterly Journal of Economics, Oxford University Press, vol. 113(1), pages 1-41.
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