Competitive Equilibria with Production and Limited Commitment

Arpad Abraham () and Eva Carceles-Poveda

No 10-04, Department of Economics Working Papers from Stony Brook University, Department of Economics

Abstract: This paper studies a production economy with aggregate uncertainty where consumers have limited commitment on their financial liabilities. Markets are endogenously incomplete due to the fact that the borrowing constraints are determined endogenously. We first show that, if competitive financial intermediaries are allowed to set the borrowing limits, then the ones that prevent default will be an equilibrium outcome. The equilibrium allocations in this economy are not constrained efficient due to the fact that intermediaries do not internalize the adverse effects of capital on default incentives. We also isolate and quantifiy this new source of inefficiency by comparing the competitive equilibrium allocations to the constrained efficient ones both qualitatively and quantitatively. We tend to observe higher capital accumulation in the competitive equilibrium, implying that agents may enjoy higher (average) welfare in the long run than in the constrained efficient allocation.

Keywords: Enforcement Constraints; Intermediation; Risk Sharing; Capital Accumulation. (search for similar items in EconPapers)
JEL-codes: D52 E23 (search for similar items in EconPapers)
Date: 2010-10
New Economics Papers: this item is included in nep-ban, nep-bec, nep-dge and nep-mic
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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http://www.stonybrook.edu/economics/research/papers/2010/risksharing.pdf First version, 2010 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:nys:sunysb:10-04

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