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Competitive equilibria with limited enforcement

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  • Patrick J. Kehoe
  • Fabrizio Perri

Abstract

We show how to decentralize constrained efficient allocations that arise from enforcement constraints between sovereign nations. In a pure exchange economy, these allocations can be decentralized with private agents acting competitively and taking as given government default decisions on foreign debt. In an economy with capital, these allocations can be decentralized if the government can tax capital income as well as default on foreign debt. The tax on capital income is needed to make private agents internalize a subtle externality. The decisions of the government can arise as an equilibrium of a dynamic game between governments.

Suggested Citation

  • Patrick J. Kehoe & Fabrizio Perri, 2003. "Competitive equilibria with limited enforcement," Staff Report 307, Federal Reserve Bank of Minneapolis.
  • Handle: RePEc:fip:fedmsr:307
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    References listed on IDEAS

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    More about this item

    Keywords

    Competition; Econometric models; Equilibrium (Economics);
    All these keywords.

    JEL classification:

    • D5 - Microeconomics - - General Equilibrium and Disequilibrium
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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