General equilibrium with endogenous uncertainty and default

We study the introduction of new assets that are defined in expected values rather than state by state. Individual default emerges naturally in an economy where such assets are introduced without completing all contingency markets. We further provide conditions under which individual default is prop...

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Bibliographic Details
Published in:Journal of mathematical economics 2006-08, Vol.42 (4), p.499-524
Main Authors: Chichilnisky, Graciela, Wu, Ho-Mou
Format: Article
Language:English
Subjects:
Assets
Collective risk
Default
Endogenous uncertainty
Equilibrium
Financial innovation
General economic equilibrium
Individual risk
Mathematical economics
Risk
Studies
Uncertainty
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Summary:We study the introduction of new assets that are defined in expected values rather than state by state. Individual default emerges naturally in an economy where such assets are introduced without completing all contingency markets. We further provide conditions under which individual default is propagated endogenously into a collective risk of widespread default in general equilibrium. We prove existence of a general equilibrium with endogenous uncertainty.
ISSN:0304-4068
1873-1538
DOI:10.1016/j.jmateco.2006.06.001