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Asset Prices, Debt Constraints and Inefficiency

  • Bloise, Gaetano
  • Reichlin, Pietro

In this paper, we consider economies with (possibly endogenous) solvency constraints under uncertainty. Constrained inefficiency corresponds to a feasible redistribution yielding a welfare improvement beginning from every contingency reached by the economy. A sort of Cass Criterion (Cass (1972)) completely characterizes constrained inefficiency. This criterion involves only observable prices and requires low interest rates in the long-run, exactly as in economies with overlapping generations. In addition, when quantitative limits to liabilities arise from participation constraints, a feasible welfare improvement, subject to participation, coincides with the introduced notion of constrained inefficiency.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6779.

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Date of creation: Apr 2008
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Handle: RePEc:cpr:ceprdp:6779
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