A Credit Mechanism for Selecting a Unique Competitive Equilibrium
We show by an iterated process of price normalization that there generically exists a price-normalizing bundle that determines a credit money, such that the enlargement of the general-equilibrium structure to allow for default subject to an appropriate credit limit and default penalty for each trader results in a construction of a simple mechanism for a credit using society to select a unique competitive equilibrium (CE). With some additional conditions, a common credit money can be applied such that any CE can be a unique selection by the credit mechanism with the appropriate credit limit and default penalties for the traders. This will include a CE with the "minimal cash flow" property. Such CEs are special for the reason that they minimize the need for a "substitute-for-trust" (i.e., money) in trade.
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|Date of creation:||Oct 2005|
|Date of revision:||Nov 2006|
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- Shapley, Lloyd S & Shubik, Martin, 1977. "An Example of a Trading Economy with Three Competitive Equilibria," Journal of Political Economy, University of Chicago Press, vol. 85(4), pages 873-75, August.
- Billera, Louis J., 1974. "On games without side payments arising from a general class of markets," Journal of Mathematical Economics, Elsevier, vol. 1(2), pages 129-139, August.
- Martin Shubik, 2000.
"The Theory of Money,"
00-03-021, Santa Fe Institute.
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