Competitive equilibria with limited enforcement

Patrick J. Kehoe, Fabrizio Perri

Research output: Contribution to journalArticle

25 Citations (Scopus)

Abstract

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.

Original languageEnglish (US)
Pages (from-to)184-206
Number of pages23
JournalJournal of Economic Theory
Volume119
Issue number1 SPEC. ISS.
DOIs
StatePublished - Nov 2004

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Limited enforcement
Competitive equilibrium
Government
Foreign debt
Capital income tax
Dynamic games
Income
Capital allocation
Enforcement
Externalities
Exchange economy
Efficient allocation
Tax

Keywords

  • Decentralization
  • Default
  • Enforcement constraints
  • Incomplete markets
  • Risk-sharing
  • Sovereign debt
  • Sustainable equilibrium

Cite this

Competitive equilibria with limited enforcement. / Kehoe, Patrick J.; Perri, Fabrizio.

In: Journal of Economic Theory, Vol. 119, No. 1 SPEC. ISS., 11.2004, p. 184-206.

Research output: Contribution to journalArticle

Kehoe, Patrick J. ; Perri, Fabrizio. / Competitive equilibria with limited enforcement. In: Journal of Economic Theory. 2004 ; Vol. 119, No. 1 SPEC. ISS. pp. 184-206.
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