Open Access. Powered by Scholars. Published by Universities.®
Social and Behavioral Sciences Commons™
Open Access. Powered by Scholars. Published by Universities.®
Articles 1 - 10 of 10
Full-Text Articles in Social and Behavioral Sciences
Liquidity, Default And Crashes: Endogenous Contracts In General Equilibrium, John Geanakoplos
Liquidity, Default And Crashes: Endogenous Contracts In General Equilibrium, John Geanakoplos
Cowles Foundation Discussion Papers
The possibility of default limits available liquidity. If the potential default draws nearer, a liquidity crisis may ensue, causing a crash in asset prices, even if the probability of default barely changes, and even if no defaults subsequently materialize. Introducing default and limited collateral into general equilibrium theory (GE) allows for a theory of endogenous contracts, including endogenous margin requirements on loans. This in turn allows GE to explain liquidity and liquidity crises in equilibrium. A formal definition of liquidity is presented. When new information raises the probability and shortens the horizon over which a fixed income asset may default, …
Liquidity, Default And Crashes: Endogenous Contracts In General Equilibrium, John Geanakoplos
Liquidity, Default And Crashes: Endogenous Contracts In General Equilibrium, John Geanakoplos
Cowles Foundation Discussion Papers
Introducing default and limited collateral into general equilibrium theory (GE) allows for a theory of endogenous contracts, including endogenous margin requirements on loans. This in turn allows GE to explain liquidity and liquidity crises in equilibrium. A formal definition of liquidity is presented. When new information raises the probability a fixed income asset may default, its drop in price may be much greater than its objective drop in value because the drop in value reduces the relative wealth of its natural buyers, who disproportiantely own the asset through leveraged purchases. When the information also shortens the horizon over which the …
Liquidity, Default And Crashes: Endogenous Contracts In General Equilibrium, John Geanakoplos
Liquidity, Default And Crashes: Endogenous Contracts In General Equilibrium, John Geanakoplos
Cowles Foundation Discussion Papers
Introducing default and limited collateral into general equilibrium theory (GE) allows for a theory of endogenous contracts, including endogenous margin requirements on loans. This in turn allows GE to explain liquidity and liquidity crises in equilibrium. A formal definition of liquidity is presented. When new information raises the probability a fixed income asset may default, its drop in price may be much greater than its objective drop in value because the drop in value reduces the relative wealth of its natural buyers, who disproportiantely own the asset through leveraged purchases. When the information also shortens the horizon over which the …
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Cowles Foundation Discussion Papers
We extend the standard model of general equilibrium with incomplete markets to allow for default and punishment. The equilibrating variables include expected delivery rates, along with the usual prices of assets and commodities. By reinterpreting the variables, our model encompasses a broad range of moral hazard, adverse selection, and signalling phenomena (including the Akerlof lemons model and Rothschild-Stiglitz insurance model) in a general equilibrium framework. We impose a condition on the expected delivery rates for untraded assets that is similar to the trembling hand refinements used in game theory. Despite earlier claims about the nonexistence of equilibrium with adverse selection, …
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Cowles Foundation Discussion Papers
We extend the standard model of general equilibrium with incomplete markets to allow for default and punishment by thinking of assets as pools. The equilibrating variables include expected delivery rates, along with the usual prices of assets and commodities. By reinterpreting the variables, our model encompasses a broad range of adverse selection and signalling phenomena in a perfectly competitive, general equilibrium framework. Perfect competition eliminates the need for lenders to compute how the size of their loan or the price they quote might affect default rates. It also makes for a simple equilibrium refinement, which we propose in order to …
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Cowles Foundation Discussion Papers
We extend the standard model of general equilibrium with incomplete markets to allow for default and punishment by thinking of assets as pools. The equilibrating variables include expected delivery rates, along with the usual prices of assets and commodities. By reinterpreting the variables, our model encompasses a broad range of adverse selection and signalling phenomena in a perfectly competitive, general equilibrium framework. Perfect competition eliminates the need for lenders to compute how the size of their loan or the price they quote might affect default rates. It also makes for a simple equilibrium refinement, which we propose in order to …
Signalling And Default: Rothschild-Stiglitz Reconsidered, Pradeep Dubey, John Geanakoplos
Signalling And Default: Rothschild-Stiglitz Reconsidered, Pradeep Dubey, John Geanakoplos
Cowles Foundation Discussion Papers
In our previous paper we built a general equilibrium model of default and punishment in which equilibrium always exists and endogenously determines asset promises, penalties, and sales constraints. In this paper we interpret the endogenous sales constraints as equilibrium signals. By specializing the default penalties and imposing an exclusivity constraint on asset sales, we obtain a perfectly competitive version of the Rothschild-Stiglitz model of insurance. In our model their separating equilibrium always exists even when they say it doesn’t.
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Cowles Foundation Discussion Papers
We extend the standard model of general equilibrium with incomplete markets to allow for default and punishment. The equilibrating variables include expected delivery rates, along with the usual prices of assets and commodities. By reinterpreting the variables, our model encompasses a broad range of adverse selection, and signalling phenomena (including the Akerlof lemons model and Rothschild-Stiglitz insurance model) and some moral hazard problems in a general equilibrium framework. Despite earlier claims about the nonexistence of equilibrium with adverse selection, we show that equilibrium always exists. We show that more lenient punishment which encourages default may be Pareto improving because it …
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Cowles Foundation Discussion Papers
We extend the standard model of general equilibrium with incomplete markets to allow for default and punishment. The equilibrating variables include expected delivery rates, along with the usual prices of assets and commodities. By reinterpreting the variables, our model encompasses a broad range of adverse selection and signalling phenomena (including the Akerlof lemons model and the Rothschild-Stiglitz insurance model) in a general equilibrium framework. Despite earlier claims about the nonexistence of equilibrium with adverse selection, we show that equilibrium always exists. We show that more lenient punishment which encourages default may be Pareto improving because it increases the dimension of …
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Default And Punishment In General Equilibrium, Pradeep Dubey, John Geanakoplos, Martin Shubik
Cowles Foundation Discussion Papers
We extend the standard model of general equilibrium with incomplete markets to allow for default and punishment by thinking of assets as pools. The equilibrating variables include expected delivery rates, along with the usual prices of assets and commodities. By reinterpreting the variables, our model encompasses a broad range of adverse selection and signalling phenomena (including the Rothschild-Stiglitz insurance model) in a general equilibrium framework. In contrast to game-theoretic models of adverse selection, our perfectly competitive framework eliminates the need for lenders to compute how the size of their loan or the price they quote might affect default rates. The …