EconPapers    
Economics at your fingertips  
 

Default and Efficiency in a General Equilibrium Model with Incomplete Markets

Pradeep Dubey, John Geanakoplos () and Martin Shubik
Additional contact information
John Geanakoplos: Cowles Foundation, Yale University, http://economics.yale.edu/people/john-geanakoplos

No 879R, 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 (GEI) to allow for default. Default can be either strategic, or due to ill-fortune. Agents who default are penalized to a degree proportional to the size of their default and to penalty parameters lambda. We find that under conditions similar to those necessary to guarantee the existence of GEI equilibrium, we get the existence of GEI_{lambda} equilibrium, for any lambda > 0. We argue that default is thus reasonably modeled as an equilibrium phenomenon. Moreover, we show that more lenient lambda which encourage default may be Pareto improving because they allow for better risk spreading. When default occurs, the Modigliani-Miller theorem typically fails to hold in our framework.

Date: 1988, Revised 1989-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (45) Track citations by RSS feed

Downloads: (external link)
http://cowles.yale.edu/sites/default/files/files/pub/d08/d0879-r.pdf (application/pdf)

Related works:
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:879r

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 Matthew Regan ().

 
Page updated 2019-11-10
Handle: RePEc:cwl:cwldpp:879r