The structure of competitive equilibrium with unsecured debt

Gaetano Bloise

No 187, Departmental Working Papers of Economics - University 'Roma Tre' from Department of Economics - University Roma Tre

Abstract: I provide a complete characterization of equilibrium with risk of default in sequential economies under uncertainty. Default induces permanent exclusion from financial markets and not-too-tight solvency constraints prevent debt repudiation at equilibrium. The method of analysis relies on a recursive planning program along with the theory of monotone concave opera- tors. The reputational mechanism is fragile, as it sustains constrained efficient as well as constrained inefficient equilibria. Constrained inefficient equilibria involve a progressive deterioration of reputation, inducing a collapse of financial markets with positive probability. Importantly, the only ergodic recursive equilibria (involving trade) are constrained efficient.

Keywords: Limited commitment; solvency constraints; competitive equilibrium; constrained efficiency; dynamic programming; monotone concave operator. (search for similar items in EconPapers)
JEL-codes: D50 D52 D61 E44 G13 (search for similar items in EconPapers)
Date: 2013-12
New Economics Papers: this item is included in nep-mic
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Persistent link: https://EconPapers.repec.org/RePEc:rtr:wpaper:0187

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