Preprint1990

Efficiency and the Role of Default When Security Markets Are Incomplete

217 citations0/0 files storedRePEc: Research Papers in Economics

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Law, Economics, and Judicial Systems Stochastic processes and financial applications Economic theories and models

Abstract

This paper argues that default plays an important positive role in the economy. If markets are incomplete and traders are only able to enter into contracts that they will be able to execute regardless of future events, contingent contracting may be severely restricted. Moreover, opening new markets may not relieve these restrictions. Default promotes efficiency in a way that opening new markets does not by making it possible for traders to enter into contracts that they will be able to execute with high probability but not with certainty. Copyright 1993 by American Economic Association.

Citations in this library

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References

1975Reexamination of the perfectness concept for equilibrium points in extensive games 1998Default and Renegotiation: A Dynamic Model of Debt 1993Debt-Constrained Asset Markets 1972Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of Markets 2008A limit theorem on the core of an economy

Cited by

2001Liquidity Constrained Markets Versus Debt Constrained Markets 2001Ambiguity Aversion and Incompleteness of Financial Markets 2013Collateral equilibrium, I: a basic framework 2007A Quantitative Theory of Unsecured Consumer Credit With Risk of Default 2012A unified model of entrepreneurship dynamics 2011Sovereign Risk Premia 2016The output costs of hard and soft sovereign default 2023Moral Hazard versus Liquidity in Household Bankruptcy

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