UNIQUE MARKOV EQUILIBRIUM UNDER LIMITED COMMITMENT

Gaetano Bloise

International Economic Review, 2020, vol. 61, issue 2, 721-751

Abstract: I develop a recursive method for the characterization of competitive equilibrium under limited commitment with not‐too‐tight solvency constraints. The reputational mechanism is fragile, as it sustains constrained efficiency as well as a large set of constrained inefficient equilibria. However, I establish that the only strongly ergodic Markov equilibrium with trade is constrained efficient. The method relies on a planning program along with the theory of monotone concave operators. It is suitable for other applications to macroeconomics and dynamic contracts.

Date: 2020
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