Working Paper: CEPR ID: DP7477
Authors: Gaetano Bloise; Pietro Reichlin; Mario Tirelli
Abstract: We prove indeterminacy of competitive equilibrium in sequential economies, where limited commitment requires the endogenous determination of solvency constraints preventing debt repudiation (Alvarez and Jermann (2000)). In particular, we show that, for any arbitrary value of social welfare in between autarchy and (constrained) optimality, there exists an equilibrium attaining that value. Our method consists in restoring Welfare Theorems for a weak notion of (constrained) optimality. The latter, inspired by Malinvaud (1953), corresponds to the absence of Pareto improving feasible redistributions over finite (though indefinite) horizons.
Keywords: debt; constraints; default; indeterminacy
JEL Codes: D50; D52; D61; E44; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| limited commitment (D10) | indeterminacy of competitive equilibrium (D59) |
| endogenous determination of solvency constraints (G33) | prevention of debt repudiation (F34) |
| social welfare levels (I38) | existence of multiple equilibria (C62) |
| debt limits not too tight (H63) | multiple equilibria (D50) |
| expectations regarding future credit constraints (D84) | current participation and default incentives (G33) |