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The structure of competitive equilibrium with unsecured debt

  • Gaetano Bloise
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    I provide a complete characterization of equilibrium with risk of default in sequential economies under uncertainty. Default induces permanent exclusion from financial markets and not-too-tight solvency constraints prevent debt repudiation at equilibrium. The method of analysis relies on a recursive planning program along with the theory of monotone concave opera- tors. The reputational mechanism is fragile, as it sustains constrained efficient as well as constrained inefficient equilibria. Constrained inefficient equilibria involve a progressive deterioration of reputation, inducing a collapse of fi nancial markets with positive probability. Importantly, the only ergodic recursive equilibria (involving trade) are constrained efficient.

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    File URL: http://dipeco.uniroma3.it/db/docs/WP%20187.pdf
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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 0187.

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    Date of creation: Dec 2013
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    Handle: RePEc:rtr:wpaper:0187
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    14. Aliprantis, Charalambos D & Brown, Donald J & Burkinshaw, Owen, 1990. "Valuation and Optimality in the Overlapping Generations Model," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 31(2), pages 275-88, May.
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    16. Eaton, Jonathan & Gersovitz, Mark, 1981. "Debt with Potential Repudiation: Theoretical and Empirical Analysis," Review of Economic Studies, Wiley Blackwell, vol. 48(2), pages 289-309, April.
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    20. Gaetano Bloise & Pietro Reichlin & Mario Tirelli, 2013. "Fragility of Competitive Equilibrium with Risk of Default," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(2), pages 271-295, April.
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