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Dynamic competitive economies with complete markets and collateral constraints


Gottardi, Piero; Kübler, Felix (2015). Dynamic competitive economies with complete markets and collateral constraints. The Review of Economic Studies, 82(3):1119-1153.

Abstract

In this article we examine the competitive equilibria of a dynamic stochastic economy with complete markets and collateral constraints. We show that, provided the sets of asset pay-offs and of collateral levels are sufficiently rich, the equilibrium allocations with sequential trades and collateral constraints are equivalent to those obtained in Arrow–Debreu markets subject to a series of limited pledgeability constraints. We provide both necessary and sufficient conditions for equilibria to be Pareto efficient and show that when collateral is scarce equilibria are not only Pareto inefficient but also often constrained inefficient, in the sense that imposing tighter borrowing restrictions can make everybody in the economy better off. We derive sufficient conditions for the existence of Markov equilibria and, for the case of two agents, for the existence of equilibria that have finite support. These equilibria can be computed with arbitrary accuracy and the model is very tractable.

Abstract

In this article we examine the competitive equilibria of a dynamic stochastic economy with complete markets and collateral constraints. We show that, provided the sets of asset pay-offs and of collateral levels are sufficiently rich, the equilibrium allocations with sequential trades and collateral constraints are equivalent to those obtained in Arrow–Debreu markets subject to a series of limited pledgeability constraints. We provide both necessary and sufficient conditions for equilibria to be Pareto efficient and show that when collateral is scarce equilibria are not only Pareto inefficient but also often constrained inefficient, in the sense that imposing tighter borrowing restrictions can make everybody in the economy better off. We derive sufficient conditions for the existence of Markov equilibria and, for the case of two agents, for the existence of equilibria that have finite support. These equilibria can be computed with arbitrary accuracy and the model is very tractable.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:2015
Deposited On:21 Dec 2015 09:48
Last Modified:08 Dec 2017 16:08
Publisher:Oxford University Press
ISSN:1467-937X
Additional Information:This is a pre-copy-editing, author-produced PDF of an article accepted for publication in The Review of Economic Studies following peer review. The definitive publisher-authenticated version Gottardi P, Kubler F: Dynamic Competitive Economies with Complete Markets and Collateral Constraints, 2015, 82(3), 1119-1153 is available online at: http://doi.org/10.1093/restud/rdv002.
Publisher DOI:https://doi.org/10.1093/restud/rdv002
Related URLs:http://restud.oxfordjournals.org/content/82/3/1119 (Publisher)
Other Identification Number:merlin-id:12578

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