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Incomplete Financial Markets With Real Assets and Endogenous Credit Limits

  • Matthew Hoelle
  • Marina Pireddu
  • Antonio Villanacci

In this paper we analyze the effects of restricted participation in a two-period gen- eral equilibrium model with uncertainty in the second period and real assets. Similar to certain arrangements in the market for bank loans, household borrowing is restricted by a household-specific wealth dependent upper bound on credit lines in all states of uncertainty in the second period. We first establish that, generically in the set of the economies, equilibria exist and are finite and regular. We then show that equilibria are generically suboptimal. Finally, we provide a robust example demonstrating that the equilibrium allocations can be Pareto improved through a tightening of the participation constraints.

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Paper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1271.

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Length: 40 pages
Date of creation: Jun 2012
Date of revision:
Handle: RePEc:pur:prukra:1271
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  1. Abdelkrim Seghir & Juan Pablo Torres-Martínez, 2010. "On equilibrium existence with endogenous restricted financial participation," Working Papers wp316, University of Chile, Department of Economics.
  2. Husseini, S. Y. & Lasry, J. -M. & Magill, M. J. P., 1990. "Existence of equilibrium with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 39-67.
  3. Radner, Roy, 1972. "Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of Markets," Econometrica, Econometric Society, vol. 40(2), pages 289-303, March.
  4. Michele Gori & Marina Pireddu & Antonio Villanacci, 2010. "Existence of financial equilibria with endogenous short selling restrictions and real assets," Working Papers - Mathematical Economics 2010-07, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa, revised Aug 2012.
  5. Polemarchakis, H. M. & Siconolfi, P., 1997. "Generic existence of competitive equilibria with restricted participation," Journal of Mathematical Economics, Elsevier, vol. 28(3), pages 289-311, October.
  6. Balasko, Yves & Cass, David & Siconolfi, Paolo, 1990. "The structure of financial equilibrium with exogenous yields : The case of restricted participation," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 195-216.
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