A Credit Mechanism for Selecting a Unique Competitive Equilibrium

Cheng-Zhong Qin

University of California at Santa Barbara, Economics Working Paper Series from Department of Economics, UC Santa Barbara

Abstract: This paper considers a credit mechanism for selecting a unique competitive equilibrium (CE). It is shown that in general there exists a “price-normalizing” bundle, with which the enlargement of the general-equilibrium structure to allow for default subject to appropriate penalties results in a construction of a simple credit mechanism for a credit using society to select a unique CE. With some additional conditions, there exists a common price-normalizing bundle with which any CE can be a unique selection for the credit mechanism with appropriate default penalties. The selection can be utilized to select a CE that minimizes the need for money or credit in trade.

Keywords: competitive equilibrium; credit mechanism; marginal utility of income; IOU; default penalty; welfare economics (search for similar items in EconPapers)
Date: 2006-03-28
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