Journal Article

Dynamic Competitive Economies with Complete Markets and Collateral Constraints

Piero Gottardi and Felix Kubler

in The Review of Economic Studies

Volume 82, issue 3, pages 1119-1153
Published in print July 2015 | ISSN: 0034-6527
Published online January 2015 | e-ISSN: 1467-937X | DOI: https://dx.doi.org/10.1093/restud/rdv002

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  • Mathematical Methods; Programming Methods; Mathematical and Simulation Modelling
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  • General Equilibrium and Disequilibrium

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In this article we examine the competitive equilibria of a dynamic stochastic economy with complete markets and collateral constraints. We show that, provided the sets of asset pay-offs and of collateral levels are sufficiently rich, the equilibrium allocations with sequential trades and collateral constraints are equivalent to those obtained in Arrow–Debreu markets subject to a series of limited pledgeability constraints. We provide both necessary and sufficient conditions for equilibria to be Pareto efficient and show that when collateral is scarce equilibria are not only Pareto inefficient but also often constrained inefficient, in the sense that imposing tighter borrowing restrictions can make everybody in the economy better off. We derive sufficient conditions for the existence of Markov equilibria and, for the case of two agents, for the existence of equilibria that have finite support. These equilibria can be computed with arbitrary accuracy and the model is very tractable.

Keywords: Dynamic general equilibrium; collateral constraints; complete markets; C6; D5; G1

Journal Article.  15119 words.  Illustrated.

Subjects: Mathematical Methods; Programming Methods; Mathematical and Simulation Modelling ; Economics ; General Equilibrium and Disequilibrium