Economics Commons^™

Default In A General Equilibrium Model With Incomplete Markets, Pradeep Dubey, John Geanakoplos, Martin Shubik

Cowles Foundation Discussion Papers

We extend the standard model of general equilibrium with incomplete markets (GEI) to allow for default. The equilibrating variables include aggregate default levels, as well as prices of assets and commodities. Default can be either strategic, or due to ill-fortune. It can be caused by events directly affecting the borrower, or indirectly as part of a chain reaction in which a borrower cannot repay because he himself has not been repaid. Each asset is defined by its promises A , the penalties lambda for default, and the limitations Q on its sale. The model is thus named GE ( A …