A Credit Mechanism for Selecting a Unique Competitive Equilibrium
University of California, Santa Barbara - Department of Economics
Yale University - School of Management; Yale University - Cowles Foundation
Cowles Foundation Discussion Paper No. 1539RR
This paper considers a credit mechanism for selecting a unique competitive equilibrium (CE). It is shown that in general there exists a "price-normalizing" bundle, with which the enlargement of the general-equilibrium structure to allow for default subject to appropriate penalties results in a construction of a simple credit mechanism for a credit using society to select a unique CE. With some additional conditions, there exists a common price-normalizing bundle with which any CE can be a unique selection for the credit mechanism with appropriate default penalties. The selection can be utilized to select a CE that minimizes the need for money or credit in trade.
Note: Previous versions of this paper can be found at: http://ssrn.com/abstract=840625 and http://ssrn.com/abstract=875632
Number of Pages in PDF File: 20
Keywords: Competitive equilibrium, Credit mechanism, Marginal utility of income, IOU, Default penalty, Welfare economics
JEL Classification: D5, C72, E4working papers series
Date posted: March 13, 2006
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