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Competitive equilibria with limited enforcement

  • Patrick J. Kehoe
  • Fabrizio Perri

Previous literature has shown that the study and characterization of constrained efficient allocations in economies with limited enforcement is useful to understand the limited risk sharing observed in many contexts, in particular between sovereign countries. In this paper we show that these constrained efficient allocations arise as equilibria in an economy in which private agents behave competitively, taking as given a set of taxes. We then show that these taxes, which end up limiting risk sharing, arise as an equilibrium of a dynamic game between governments. Our decentralization is different from the existing ones proposed in the literature. We find it intuitively appealing and we think it goes farther than the existing literature in endogenizing the primitive forces that lead to a lack of risk sharing in equilibrium. (Replaced by Staff Report No: 307)

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Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 621.

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Date of creation: 2002
Date of revision:
Handle: RePEc:fip:fedmwp:621
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  1. Timothy J Kehoe & David K Levine, 1993. "Debt Constrained Asset Markets," Levine's Working Paper Archive 1276, David K. Levine.
  2. Abreu, Dilip, 1988. "On the Theory of Infinitely Repeated Games with Discounting," Econometrica, Econometric Society, vol. 56(2), pages 383-96, March.
  3. Kehoe, Timothy J & Levine, David K, 2001. "Liquidity Constrained Markets versus Debt Constrained Markets," Econometrica, Econometric Society, vol. 69(3), pages 575-98, May.
  4. repec:oup:restud:v:60:y:1993:i:4:p:865-88 is not listed on IDEAS
  5. Karsten Jeske, 2005. "Private international debt with risk of repudiation," FRB Atlanta Working Paper 2001-16, Federal Reserve Bank of Atlanta.
  6. Patrick J. Kehoe & Fabrizio Perri, 2002. "International Business Cycles with Endogenous Incomplete Markets," Econometrica, Econometric Society, vol. 70(3), pages 907-928, May.
  7. repec:oup:restud:v:69:y:2002:i:1:p:209-44 is not listed on IDEAS
  8. Chari, V V & Kehoe, Patrick J, 1990. "Sustainable Plans," Journal of Political Economy, University of Chicago Press, vol. 98(4), pages 783-802, August.
  9. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987. "International real business cycles," Working Papers 426, Federal Reserve Bank of Minneapolis.
  10. Juha Seppala, 2000. "Asset Prices And Business Cycles Under Limited Commitment," Computing in Economics and Finance 2000 319, Society for Computational Economics.
  11. Mark L. J. Wright, 2004. "Private capital flows, capital controls, and default risk," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
  12. Attanasio, Orazio & Rios-Rull, Jose-Victor, 2000. "Consumption smoothing in island economies: Can public insurance reduce welfare?," European Economic Review, Elsevier, vol. 44(7), pages 1225-1258, June.
  13. Kenneth M. Kletzer and Brian D. Wright., 1998. "Sovereign Debt as Intertemporal Barter," Center for International and Development Economics Research (CIDER) Working Papers C98-100, University of California at Berkeley.
  14. repec:oup:restud:v:48:y:1981:i:2:p:289-309 is not listed on IDEAS
  15. repec:oup:restud:v:63:y:1996:i:4:p:595-609 is not listed on IDEAS
  16. Baxter, M. & Crucini, M., 1991. "Business Cycles and the Asset Structure of Foreign Trade," RCER Working Papers 316, University of Rochester - Center for Economic Research (RCER).
  17. repec:oup:restud:v:60:y:1993:i:1:p:175-95 is not listed on IDEAS
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