On optimality in intergenerational risk sharing

This paper defines and studies optimality in a dynamic stochastic economy with finitely lived agents, and investigates the optimality properties of an equilibrium with or without sequentially complete markets. Various Pareto optimality concepts are considered, including interim and ex ante optimality. We show that, at an equilibrium with a productive asset (land) and sequentially complete markets, the intervention of a government may be justified, but only to improve risk sharing between generations. If markets are incomplete, constrained interim optimality is investigated in two-period lived OLG economies. We extend the optimality properties of an equilibrium with land and examine conditions under which introducing a pay-as-you-go system would not lead to any Pareto improvement upon an equilibrium.Overlapping generations; Incomplete markets; Optimality

Sequential incompleteness and dynamic suboptimality in stochastic OLG economies with production

I study a stochastic overlapping generations model with production and three-period- lived agents. Agents trade bonds and risky capital. Unlike the two-period model, I show that a stationary equilibrium in which prices and allocations depend solely on the aggregate capital stock and the current shock does not exist. The recursive equilibrium becomes the relevant equilibrium concept. For the recursive formulation of the model, markets are sequentially incomplete and hence I show that there is room for Pareto improvements in terms of intergenerational risk sharing. Finally, I examine whether the introduction of capital income taxation improves the allocation of risk.Overlapping generations, uncertainty, capital income taxation.

How do Securities Laws Influence Affect, Happiness, & Trust?

This Article advocates that securities regulators promulgate rules based upon taking into consideration their impacts upon investors\u27 and others\u27 affect, happiness, and trust. Examples of these impacts are consumer optimism, financial stress, anxiety over how thoroughly securities regulators deliberate over proposed rules, investor confidence in securities disclosures, market exuberance, social moods, and subjective well-being. These variables affect and are affected by traditional financial variables, such as consumer debt, expenditures, and wealth; corporate investment; initial public offerings; and securities market demand, liquidity, prices, supply, and volume. This Article proposes that securities regulators can and should evaluate rules based upon measures of affect, happiness, and trust in addition to standard observable financial variables. This Article concludes that the organic statutes of the United States Securities and Exchange Commission are indeterminate despite mandating that federal securities laws consider efficiency among other goals. This Article illustrates analysis of affective impacts of these financial regulatory policies: mandatory securities disclosures; gun-jumping rules for publicly registered offerings; financial education or literacy campaigns; statutory or judicial default rules and menus; and continual reassessment and revision of rules. These regulatory policies impact and are impacted by investors\u27 and other people\u27s affect, happiness, and trust. Thus, securities regulators can and should evaluate such affective impacts to design effective legal policy

Indeterminacy of competitive equilibrium with risk of default

We prove indeterminacy of competitive equilibrium in sequential economies, where limited commitment requires the endogenous determination of solvency constraints preventing debt repudiation (Alvarez and Jermann [3]). In particular, we show that, for any arbitrary value of social welfare in between autarchy and (constrained) optimality, there exists an equilibrium attaining that value. Our method consists in restoring Welfare Theorems for a weak notion of (constrained) optimality. The latter, inspired by Malinvaud [15], corresponds to the absence of Pareto improving feasible redistributions over nite (though inde nite) horizons.imited commitment; solvency constraints; Malinvaud efficiency Welfare Theorems; indeterminacy; Welfare Theorems; indeterminacy; Welfare Theorems indeterminacy;financial fragility; market collapse

Asset prices, debt constraints and inefficiency

In this paper, we consider economies with (possibly endogenous) solvency constraints under uncertainty. Constrained ine±ciency corresponds to a feasible redistribution yielding a welfare improvement beginning from ev- ery contingency reached by the economy. A sort of Cass Criterion (Cass [10]) completely characterizes constrained ine±ciency. 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 im- provement, subject to participation, coincides with the introduced notion of constrained ine±ciency.Private debt; solvency constraints; default; Cass Criterion; asset

History : Sunk Cost, or Widespread Externality?

In an intertemporal Arrow-Debreu economy with a continuum of agents, suppose that the auctioneer sets prices while the government institutes optimal lump-sum transfers period by period. An earlier paper showed how subgame imperfections arise because agents understand how their current decisions such as those determining investment will influence future lump-sum transfers. This observation undermines the second efficiency theorem of welfare economics and makes “history” a widespread externality. A two-period model is used to investigate the constrained efficiency properties of different kinds of equilibrium. Possibilities for remedial policy are also discussed.

Asset Prices, Debt Constraints and Inefficiency

In this paper, we consider economies with (possibly endogenous) solvency constraints under uncertainty. Constrained ine±ciency corresponds to a feasible redistribution yielding a welfare improvement beginning from every contingency reached by the economy. A sort of Cass Criterion (Cass [10]) 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.In this paper, we consider economies with (possibly endogenous) solvency constraints under uncertainty. Constrained ine±ciency corresponds to a feasible redistribution yielding a welfare improvement beginning from every contingency reached by the economy. A sort of Cass Criterion (Cass [10]) 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.Non-Refereed Working Papers / of national relevance onl

Walrasian Non-tâtonnement with Incomplete and Imperfectly Competitive Markets

URL des Documents de travail :http://ces.univ-paris1.fr/cesdp/CESFramDP2007.htmDocuments de travail du Centre d'Economie de la Sorbonne 2007.21 - ISSN : 1955-611XStatic competitive equilibria in economies with incomplete markets are generically constrained suboptimal. Allocations induced by strategic equilibria of imperfectly competitive markets are also generically inefficient. In both cases, there is scope for Pareto-improving amendments. In an extension of the limit-price process introduced in Giraud [20] to incomplete markets (with infinitely many uncertain states) populated by finitely many players, we show that these two inefficiency problems can be partially overcome when rephrased in a non-tatonnement process. Traders are myopic and trade financial securities in continuous time by sending limit-orders so as to select a portfolio that maximizes the first-order approximation of their expected indirect utility. We show that financial trade curves exist and converge to some second-best efficient restpoint unless some miscoordination stops the dynamics at some inefficient, but locally unstable point.Les équilibres concurrentiels statiques d'une économie avec marchés incomplets sont génériquement sous-optimaux de second rang. Les allocations induites par les équilibres stratégiques de marchés imparfaitement concurrentiels sont également génériquement inefficients. Dans chaque cas, un espace ouvert pour une amélioration Parétienne. Par une extension du processus de prix-limites introduit in Giraud [20] aux marchés incomplets (avec une infinité d'états incertains) peuplés d'un nombre fini de joueurs, on montre que ces deux problèmes d'inefficience peuvent être partiellement résolus une fois replacés dans un processus de non-tâtonnement. Les agents sont myopes et échangent des actifs financiers en temps continu, en envoyant des ordres de prix-limites de manière à sélectionner un portefeuille qui maximise l'approximation au premier ordre de leur utilité espérée indirecte. On montre que les courbes d'échanges financiers existent et convergent vers un point stationnaire efficient du second ordre à moins qu'une erreur de coordination n'interrompe la dynamique en un point inefficient, mais localement instable