Asset Prices, Debt Constraints and Inefficiency

Gaetano Bloise and Pietro Reichlin

No 803, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: In this paper, we consider economies with (possibly endogenous) solvency constraints under uncertainty. Constrained inefficiency corresponds to a feasible redistribution yielding a welfare improvement beginning from every contingency reached by the economy. A sort of Cass Criterion (Cass, 1972) completely characterizes constrained inefficiency. This criterion involves only observable prices and requires low interest rates in the long-run, exactly as in economies with overlapping generations. In addition, when quantitative limits to liabilities arise from participation constraints, a feasible welfare improvement, subject to participation, coincides with the introduced notion of constrained inefficiency.

Pages: 26 pages
Date: 2008, Revised 2008-03
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Asset prices, debt constraints and inefficiency (2011)
Working Paper: Asset Prices, Debt Constraints and Inefficiency (2008)
Working Paper: Asset prices, debt constraints and inefficiency (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eie:wpaper:0803

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