A Credit Mechanism for Selecting a Unique Competitive Equilibrium
Cheng-Zhong Qin () and
No 1539, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University
We show by an iterated process of price normalization that there generically exists a price-normalizing bundle that determines a credit money, such that the enlargement of the general-equilibrium structure to allow for default subject to an appropriate credit limit and default penalty for each trader results in a construction of a simple mechanism for a credit using society to select a unique competitive equilibrium (CE). With some additional conditions, a common credit money can be applied such that any CE can be a unique selection by the credit mechanism with the appropriate credit limit and default penalties for the traders. This will include a CE with the "minimal cash flow" property. Such CEs are special for the reason that they minimize the need for a "substitute-for-trust" (i.e., money) in trade.
Keywords: Competitive equilibrium; Credit mechanism; Marginal utility of income; IOU; Default penalty; Welfare economics (search for similar items in EconPapers)
JEL-codes: D5 C72 E4 (search for similar items in EconPapers)
Date: 2005-10, Revised 2006-11
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Working Paper: A Credit Mechanism for Selecting a Unique Competitive Equilibrium (2009)
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