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Competitive equilibria with limited enforcement

Kehoe, PJ; Perri, F; (2004) Competitive equilibria with limited enforcement. Journal of Economic Theory , 119 (1) pp. 184-206. 10.1016/S0022-0531(03)00255-2. Green open access

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We show how to decentralize constrained efficient allocations that arise from enforcement constraints between sovereign nations. In a pure exchange economy these allocations can be decentralized with private agents acting competitively and taking as given government default decisions on foreign debt. In an economy with capital these allocations can be decentralized if the government can tax capital income as well as default on foreign debt. The tax on capital income is needed to make private agents internalize a subtle externality. The decisions of the government can arise as an equilibrium of a dynamic game between governments.

Type: Article
Title: Competitive equilibria with limited enforcement
Location: Venice Int Univ, Venice, ITALY
Open access status: An open access version is available from UCL Discovery
DOI: 10.1016/S0022-0531(03)00255-2
Publisher version: https://doi.org/10.1016/S0022-0531(03)00255-2
Language: English
Additional information: This version is the author accepted manuscript. For information on re-use, please refer to the publisher’s terms and conditions.
Keywords: Incomplete markets, Risk-sharing, Enforcement constraints, Sovereign debt, Decentralization, Sustainable equilibrium, Default
UCL classification: UCL
UCL > Provost and Vice Provost Offices
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
URI: https://discovery.ucl.ac.uk/id/eprint/10058354
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