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Two-Sided Altruism in an OLG Model with Incomplete Markets and Default

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  • Maldonado, Wilfredo L.
  • Orrillo, Jaime

Abstract

This paper shows the existence of equilibrium and its non-triviality (i.e. there exist, in all periods, both trade and default in the security markets) in an overlapping generation model with incomplete markets. This result is obtained by assuming that agents in the economy exhibit two-sided altruism in the following way: each agent may leave a financial inheritance to his only offspring (forward altruism) in the last period of his life, and in the same period, the descendant may accumulate debts in the name of the agent i.e., the father (backward altruism). Thus, if the descendant does not honor the commitment acquired in the name of his antecessor, he will suffer penalties in his utility function. To avoid the excessive issuance of debt, we shall suppose that the agent (the father) suffers a disutility in proportion to the net value of the debt left to his descendant (the son).

Suggested Citation

  • 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.
    • Handle: RePEc:sbe:breart:v:26:y:2006:i:2:a:1580
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    References listed on IDEAS

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    1. 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.
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    8. Gottardi, Piero, 1996. "Stationary Monetary Equilibria in Overlapping Generations Models with Incomplete Markets," Journal of Economic Theory, Elsevier, vol. 71(1), pages 75-89, October.
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    11. Cass, David & Green, Richard C & Spear, Stephen E, 1992. "Stationary Equilibria with Incomplete Markets and Overlapping Generations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(3), pages 495-512, August.
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    Cited by:

    1. Orrillo, Jaime & Filho, Jolive de Santana Filho, 2020. "Existence and Non-Triviality of Equilibria in Economies with Default and Government," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 39(2), March.
    2. Orrillo, Jaime & Filho, Jolive de Santana Filho, 2019. "Existence and Non-Triviality of Equilibria in Economies with Default and Government," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 39(2).

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