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Asset prices, debt constraints and inefficiency

Gaetano Bloise and Pietro Reichlin

Journal of Economic Theory, 2011, vol. 146, issue 4, 1520-1546

Abstract: We consider (possibly non-stationary) economies with endogenous solvency constraints under uncertainty over an infinite horizon, as in Alvarez and Jermann (2000) [5]. A sort of Cass Criterion (Cass, 1972 [10]) completely characterizes constrained inefficiency under the hypothesis of uniform gains from risk-sharing (which is always satisfied in stationary economies when the autarchy is constrained inefficient). Uniform gains from risk-sharing also guarantee a finite value of the intertemporal aggregate endowment at a constrained optimum. Hence, no equilibrium exhibits a null interest rate in the long run. Finally, constrained inefficiency occurs if and only if there exists a feasible redistribution producing a welfare improvement at all contingencies.

Keywords: Private; debt; Solvency; constraints; Default; Cass; Criterion; Asset; prices; Incomplete; markets; Constrained; inefficiency; Transversality; condition (search for similar items in EconPapers)
Date: 2011
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Related works:
Working Paper: Asset Prices, Debt Constraints and Inefficiency (2008) Downloads
Working Paper: Asset Prices, Debt Constraints and Inefficiency (2008) Downloads
Working Paper: Asset prices, debt constraints and inefficiency (2008) Downloads
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