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Asset prices, debt constraints and inefficiency

  • Gaetano Bloise
  • Pietro Reichlin

In this paper, we consider economies with (possibly endogenous) solvency constraints under uncertainty. Constrained ine±ciency corresponds to a feasible redistribution yielding a welfare improvement beginning from ev- ery contingency reached by the economy. A sort of Cass Criterion (Cass [10]) completely characterizes constrained ine±ciency. 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 im- provement, subject to participation, coincides with the introduced notion of constrained ine±ciency.

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Paper provided by Department of Economics - University Roma Tre in its series Departmental Working Papers of Economics - University 'Roma Tre' with number 0089.

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Length: 29
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:rtr:wpaper:0089
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  18. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  19. Scheinkman, Jose A & Weiss, Laurence, 1986. "Borrowing Constraints and Aggregate Economic Activity," Econometrica, Econometric Society, vol. 54(1), pages 23-45, January.
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