A Credit Mechanism for Selecting a Unique Competitive Equilibrium

Cheng-Zhong Qin () and Martin Shubik

No 1539, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: 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: C72 D5 E4 (search for similar items in EconPapers)
Pages: 21 pages
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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