DP7477 | Indeterminacy of Competitive Equilibrium with Risk of Default

Publication Date

27/09/2009

JEL Code(s)

Keyword(s)

Programme Area(s)

Network(s)

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.