General Equilibrium with Endogenous Uncertainty and Default
26 Pages Posted: 14 Apr 2009
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General Equilibrium with Endogenous Uncertainty and Default
Date Written: May 2006
Abstract
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.
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