Default and Punishment in General Equilibrium
Pradeep Dubey,
John Geanakoplos () and
Martin Shubik ()
Additional contact information
John Geanakoplos: Yale University, Cowles Foundation, https://economics.yale.edu/people/faculty/john-geanakoplos
Martin Shubik: Yale University, Cowles Foundation, https://economics.yale.edu/people/memoriam/martin-shubik
No 1304, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University
Abstract:
We extend the standard model of general equilibrium with incomplete markets to allow for default and punishment. The equilibrating variables include expected delivery rates, along with the usual prices of assets and commodities. By reinterpreting the variables, our model encompasses a broad range of moral hazard, adverse selection, and signalling phenomena (including the Akerlof lemons model and Rothschild-Stiglitz insurance model) in a general equilibrium framework. We impose a condition on the expected delivery rates for untraded assets that is similar to the trembling hand refinements used in game theory. Despite earlier claims about the nonexistence of equilibrium with adverse selection, we show that equilibrium always exists, even with exclusivity constraints on asset sales, and transactions-liquidity costs or information-evaluation costs for asset trade. We show that more lenient punishment which encourages default may be Pareto improving because it allows for better risk spreading. We also show that default opens the door to a theory of endogenous assets.
Keywords: Default; incomplete markets; adverse selection; moral hazard; equilibrium refinement; endogenous assets (search for similar items in EconPapers)
JEL-codes: D4 D41 D5 D52 D8 D81 D82 (search for similar items in EconPapers)
Pages: 48 pages
Date: 2001-05
New Economics Papers: this item is included in nep-ent, nep-gth and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)
Downloads: (external link)
https://cowles.yale.edu/sites/default/files/files/pub/d13/d1304.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found
Related works:
Journal Article: Default and Punishment in General Equilibrium (2005) 
Working Paper: Default and Punishment in General Equilibrium (2004) 
Working Paper: Default and Punishment in General Equilibrium (2001) 
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:cwl:cwldpp:1304
Ordering information: This working paper can be ordered from
Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
The price is None.
Access Statistics for this paper
More papers in Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University Yale University, Box 208281, New Haven, CT 06520-8281 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Brittany Ladd ().