Econometrica: Jan 2005, Volume 73, Issue 1

Default and Punishment in General Equilibrium

https://doi.org/10.1111/j.1468-0262.2005.00563.x
p. 1-37

Pradeep Dubey, John Geanakoplos, Martin Shubik

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.

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