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Asset prices, debt constraints and inefficiency

Asset prices, debt constraints and inefficiency,10.1016/j.jet.2011.03.007,Journal of Economic Theory,Gaetano Bloise,Pietro Reichlin

Asset prices, debt constraints and inefficiency   (Citations: 1)
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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.
Journal: Journal of Economic Theory - J ECON THEOR , vol. 146, no. 4, pp. 1520-1546, 2011
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