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Making promises in infinite-horizon economies with default and collateral

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  • Orrillo, Jaime

Abstract

We study an infinite-horizon economy with incomplete markets where default is explicitly allowed, contrary to the GE11General equilibrium with complete markets. model (where default is ruled out by assumption). The time and uncertainty are modeled by a countable infinite event-tree with a unique initial node at initial date, and with a continuum of branches at each node of the tree. If we allow agents to sell promises subject to the purchase of durable goods serving as collateral, then it is possible to prove the existence of equilibria without imposing either constraint on agent’s asset holdings, or assumption on ex post endowments. The proof is independent of the manner in which households discount the future.

Suggested Citation

  • Orrillo, Jaime, 2009. "Making promises in infinite-horizon economies with default and collateral," Mathematics and Computers in Simulation (MATCOM), Elsevier, vol. 79(10), pages 3055-3068.
    • Handle: RePEc:eee:matcom:v:79:y:2009:i:10:p:3055-3068
    DOI: 10.1016/j.matcom.2009.02.003
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    References listed on IDEAS

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    5. Levine, David K. & Zame, William R., 1996. "Debt constraints and equilibrium in infinite horizon economies with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 26(1), pages 103-131.
    6. Orrillo, Jaime, 2001. "Default and exogenous collateral in incomplete markets with a continuum of states," Journal of Mathematical Economics, Elsevier, vol. 35(1), pages 151-165, February.
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    Cited by:

    1. Wilfredo L. Maldonado & Jaime Orrillo, 2007. "Collateral or utility penalties?," International Journal of Economic Theory, The International Society for Economic Theory, vol. 3(2), pages 95-111, June.
    2. Maldonado, Wilfredo L. & Orrillo, Jaime, 2006. "Two-Sided Altruism in an OLG Model with Incomplete Markets and Default," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 26(2), November.
    3. Orrillo, Jaime, 2005. "Collateral once again," Economics Letters, Elsevier, vol. 87(1), pages 27-33, April.

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    More about this item

    Keywords

    Incomplete markets; Exogenous collateral; Continuum of states; Infinite horizon;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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