Asset prices, debt constraints and inefficiency

Gaetano Bloise and Pietro Reichlin

No 89, Departmental Working Papers of Economics - University 'Roma Tre' from Department of Economics - University Roma Tre

Abstract: In this paper, we consider economies with (possibly endogenous) solvency constraints under uncertainty. Constrained ine±ciency corresponds to a feasible redistribution yielding a welfare improvement beginning from ev- ery contingency reached by the economy. A sort of Cass Criterion (Cass [10]) completely characterizes constrained ine±ciency. 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 im- provement, subject to participation, coincides with the introduced notion of constrained ine±ciency.

Keywords: Private debt; solvency constraints; default; Cass Criterion; asset (search for similar items in EconPapers)
JEL-codes: D50 D52 D61 E44 G13 (search for similar items in EconPapers)
Pages: 29
Date: 2008-01
New Economics Papers: this item is included in nep-dge and nep-mac
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Citations: View citations in EconPapers (6)

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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:rtr:wpaper:0089

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