A Credit Mechanism for Selecting a Unique Competitive Equilibrium

22 Pages Posted: 10 Dec 2006

See all articles by Cheng-Zhong Qin

Cheng-Zhong Qin

University of California, Santa Barbara (UCSB) - Department of Economics

Martin Shubik

Yale University - School of Management; Yale University - Cowles Foundation

Multiple version iconThere are 4 versions of this paper

Date Written: November 2006

Abstract

We show by an iterated process of price normalization that there generically exists a price-normalizing bundle that determines a credit money, such that the enlargement of the general-equilibrium structure to allow for default subject to an appropriate credit limit and default penalty for each trader results in a construction of a simple mechanism for a credit using society to select a unique competitive equilibrium (CE). With some additional conditions, a common credit money can be applied such that any CE can be a unique selection by the credit mechanism with the appropriate credit limit and default penalties for the traders. This will include a CE with the "minimal cash flow" property. Such CEs are special for the reason that they minimize the need for a "substitute-for-trust" (i.e. money) in trade.

Keywords: Competitive equilibrium, Credit mechanism, Marginal utility of income, IOU, Default penalty, Welfare economics

JEL Classification: D5, C72, E4

Suggested Citation

Qin, Cheng-Zhong and Shubik, Martin, A Credit Mechanism for Selecting a Unique Competitive Equilibrium (November 2006). Cowles Foundation Discussion Paper No. 1539R2, Available at SSRN: https://ssrn.com/abstract=950504

Cheng-Zhong Qin

University of California, Santa Barbara (UCSB) - Department of Economics ( email )

2127 North Hall
Santa Barbara, CA 93106
United States

Martin Shubik (Contact Author)

Yale University - School of Management ( email )

Box 208200
New Haven, CT 06520-8200
United States

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States
203-432-3694 (Phone)
203-432-6167 (Fax)

HOME PAGE: http://cowles.econ.yale.edu/P/au/d_shubik.htm

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