Information-Constrained Optima with Retrading: An Externality and Its Market-Based Solution

This paper studies the efficiency of competitive equilibria in environments with a moral hazard problem and unobserved states, both with retrading in ex post spot markets. The interaction between private information problems and the possibility of retrade creates an externality, unless preferences have special, restrictive properties. The externality is internalized by allowing agents to contract ex ante on market fundamentals determining the spot price or interest rate, over and above contracting on actions and outputs. Then competitive equilibria are equivalent with the appropriate notion of constrained Pareto optimality. Examples show that it is possible to have multiple market fundamentals or price islands, created endogenously in equilibrium.Externalities; Private information; Moral hazard; Retrading; Walrasian equilibrium; Constrained efficiency; Decentralization

Market Based, Segregated Exchanges with Default Risk

This paper studies a competitive general equilibrium model with default and endogenous collateral constraints. Even though all collateralized contracts are allowed, the possibility and desirability of trade in spot markets (or the equivalent trade in ex ante asset backed securities) creates externalities, as spot prices (or security prices) and the bindingness of collateral constraints interact. We show that if agents are allowed to contract ex ante on market fundamentals determining the state-contingent spot price, over and above contracting on true underlying states of the world, then competitive equilibria with bundled securities and commodities and with endogenous collateral constraints are equivalent with Pareto optima. Examples show that it is possible to have multiple market fundamentals in equilibrium. Equivalently, it is possible for there to be segregation into distinct competitive securities exchanges with endogenous (positive and negative) entry fees. Fees accrue to borrowers who are otherwise collateral constrained.default; endogenous collateral; externalities; segregated exchanges; Walrasian equilibrium; limited commitment; financial crises

Trade through endogenous intermediaries

We apply an intermediation game of Townsend (1983) to analyze trade in an exchange economy through endogenous intermediaries. In this game, each trader has the opportunity to become an intermediary by oering to buy or sell unlimited quantities of the commodities at a certain price vector and for a certain group of customers subject to feasibility constraint. An intermediary will not be active unless some of its customers subsequently choose to trade with it. We introduce an "intermediation core" and show that the subgame-perfect equilibrium allocations of the intermediation game are contained in the intermediation core, similar to the inclusion of competitive equilibrium allocations in the core usually studied. We also identify, in terms of the supporting intermediary structures, intermediation core allocations which are also subgame-perfect equilibrium allocations of the intermediation game. These results provide both a characterization and welfare properties of subgame-perfect equilibrium allocations of the intermediation game.intermediation; core; subgame-perfect equilibrium

Information-constrained optima with retrading: An externality and its market-based solution

This paper studies the efficiency of competitive equilibria in environments with a moral hazard problem and unobserved states, both with retrading in ex post spot markets. The interaction between private information problems and the possibility of retrade creates an externality, unless preferences have special, restrictive properties. The externality is internalized by allowing agents to contract ex ante on market fundamentals determining the spot price or interest rate, over and above contracting on actions and outputs. Then competitive equilibria are equivalent with the appropriate notion of constrained Pareto optimality. Examples show that it is possible to have multiple market fundamentals or price-islands, created endogenously in equilibrium

Market Based, Segregated Exchanges with Default Risk

This paper studies a competitive general equilibrium model with default and endogenous collateral constraints. Even though all collateralized contracts are allowed, the possibility and desirability of trade in spot markets (or the equivalent trade in ex ante asset backed securities) creates externalities, as spot prices (or security prices) and the bindingness of collateral constraints interact. We show that if agents are allowed to contract ex ante on market fundamentals determining the state-contingent spot price, over and above contracting on true underlying states of the world, then competitive equilibria with bundled securities and commodities and with endogenous collateral constraints are equivalent with Pareto optima. Examples show that it is possible to have multiple market fundamentals in equilibrium. Equivalently, it is possible for there to be segregation into distinct competitive securities exchanges with endogenous (positive and negative) entry fees. Fees accrue to borrowers who are otherwise collateral constrained

Market Based, Segregated Exchanges with Default Risk

This paper studies a competitive general equilibrium model with default and endogenous collateral constraints. Even though all collateralized contracts are allowed, the possibility and desirability of trade in spot markets (or the equivalent trade in ex ante asset backed securities) creates externalities, as spot prices (or security prices) and the bindingness of collateral constraints interact. We show that if agents are allowed to contract ex ante on market fundamentals determining the state-contingent spot price, over and above contracting on true underlying states of the world, then competitive equilibria with bundled securities and commodities and with endogenous collateral constraints are equivalent with Pareto optima. Examples show that it is possible to have multiple market fundamentals in equilibrium. Equivalently, it is possible for there to be segregation into distinct competitive securities exchanges with endogenous (positive and negative) entry fees. Fees accrue to borrowers who are otherwise collateral constrained

Trade through endogenous intermediaries

We apply an intermediation game of Townsend (1983) to analyze trade in an exchange economy through endogenous intermediaries. In this game, each trader has the opportunity to become an intermediary by oering to buy or sell unlimited quantities of the commodities at a certain price vector and for a certain group of customers subject to feasibility constraint. An intermediary will not be active unless some of its customers subsequently choose to trade with it. We introduce an "intermediation core" and show that the subgame-perfect equilibrium allocations of the intermediation game are contained in the intermediation core, similar to the inclusion of competitive equilibrium allocations in the core usually studied. We also identify, in terms of the supporting intermediary structures, intermediation core allocations which are also subgame-perfect equilibrium allocations of the intermediation game. These results provide both a characterization and welfare properties of subgame-perfect equilibrium allocations of the intermediation game

Trade through endogenous intermediaries

We apply an intermediation game of Townsend (1983) to analyze trade in an exchange economy through endogenous intermediaries. In this game, each trader has the opportunity to become an intermediary by oering to buy or sell unlimited quantities of the commodities at a certain price vector and for a certain group of customers subject to feasibility constraint. An intermediary will not be active unless some of its customers subsequently choose to trade with it. We introduce an "intermediation core" and show that the subgame-perfect equilibrium allocations of the intermediation game are contained in the intermediation core, similar to the inclusion of competitive equilibrium allocations in the core usually studied. We also identify, in terms of the supporting intermediary structures, intermediation core allocations which are also subgame-perfect equilibrium allocations of the intermediation game. These results provide both a characterization and welfare properties of subgame-perfect equilibrium allocations of the intermediation game

Collateral premia and risk sharing under limited commitment

Collateral premium, Complete collateralized contracts, General equilibrium, Limited commitment, Endogenous incomplete markets, D52, D53,

A Market-Based Solution for Fire Sales and Other Pecuniary Externalities

In economies with a continuum of agents of different types, pecuniary externalities are removed with market exchanges. Agents choose from among various possible prices they want to prevail in the future and buy or sell rights in these market exchanges for future trade. Each agent can choose the exchange it wants without regard to what any other agent is doing. But crucially, the right to trade in each and every exchange is priced. The fee structure has a per-unit price and quantity decomposition: a price, as determined by the exchange chosen, times the quantity of rights acquired