Asset Prices, Debt Constraints and Inefficiency

Pietro Reichlin and Gaetano Bloise

No 6779, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: In this paper, we consider economies with (possibly endogenous) solvency constraints under uncertainty. Constrained inefficiency corresponds to a feasible redistribution yielding a welfare improvement beginning from every contingency reached by the economy. A sort of Cass Criterion (Cass (1972)) completely characterizes constrained inefficiency. This criterion involves only observable prices and requires low interest rates in the long-run, exactly as in economies with overlapping generations. In addition, when quantitative limits to liabilities arise from participation constraints, a feasible welfare improvement, subject to participation, coincides with the introduced notion of constrained inefficiency.

Keywords: Constrained inefficiency; Default; Private debt; Solvency constraints; Asset prices; Cass criterion (search for similar items in EconPapers)
JEL-codes: D50 D52 D61 E44 G13 (search for similar items in EconPapers)
Date: 2008-04
New Economics Papers: this item is included in nep-cba and nep-mac
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Citations: View citations in EconPapers (2)

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Related works:
Journal Article: Asset prices, debt constraints and inefficiency (2011)
Working Paper: Asset Prices, Debt Constraints and Inefficiency (2008)
Working Paper: Asset prices, debt constraints and inefficiency (2008)
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