We consider (possibly non-stationary) economies with endogenous solvency constraints under uncertainty over an infinite horizon, as in Alvarez and Jermann (2000) [5]. A sort of Cass Criterion (Cass, 1972 [10]) completely characterizes constrained inefficiency under the hypothesis of uniform gains from risk-sharing (which is always satisfied in stationary economies when the autarchy is constrained inefficient). Uniform gains from risk-sharing also guarantee a finite value of the intertemporal aggregate endowment at a constrained optimum. Hence, no equilibrium exhibits a null interest rate in the long run. Finally, constrained inefficiency occurs if and only if there exists a feasible redistribution producing a welfare improvement at all contingencies.

Asset prices, Debt Constraints and Inefficiency / Gaetano, Bloise; Reichlin, Pietro. - In: JOURNAL OF ECONOMIC THEORY. - ISSN 0022-0531. - 146:4(2011), pp. 1520-1546. [10.1016/j.jet.2011.03.007]

Asset prices, Debt Constraints and Inefficiency

REICHLIN, PIETRO
2011

Abstract

We consider (possibly non-stationary) economies with endogenous solvency constraints under uncertainty over an infinite horizon, as in Alvarez and Jermann (2000) [5]. A sort of Cass Criterion (Cass, 1972 [10]) completely characterizes constrained inefficiency under the hypothesis of uniform gains from risk-sharing (which is always satisfied in stationary economies when the autarchy is constrained inefficient). Uniform gains from risk-sharing also guarantee a finite value of the intertemporal aggregate endowment at a constrained optimum. Hence, no equilibrium exhibits a null interest rate in the long run. Finally, constrained inefficiency occurs if and only if there exists a feasible redistribution producing a welfare improvement at all contingencies.
Private debt, Solvency constraints, Default, Cass Criterion, Asset prices, Incomplete markets, Constrained inefficiency, Transversality condition
Asset prices, Debt Constraints and Inefficiency / Gaetano, Bloise; Reichlin, Pietro. - In: JOURNAL OF ECONOMIC THEORY. - ISSN 0022-0531. - 146:4(2011), pp. 1520-1546. [10.1016/j.jet.2011.03.007]
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Utilizza questo identificativo per citare o creare un link a questo documento: http://hdl.handle.net/11385/7520
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