Competitive equilibria with limited enforcement

Patrick Kehoe and Fabrizio Perri

No 307, Staff Report from Federal Reserve Bank of Minneapolis

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.

Keywords: Competition; Econometric models; Equilibrium (Economics) (search for similar items in EconPapers)
Date: 2003
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Published in Journal of Economic Theory (Vol. 119, No. 1, November 2004, pp. 184-206)

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Journal Article: Competitive equilibria with limited enforcement (2004)
Working Paper: Competitive equilibria with limited enforcement (2002)
Working Paper: Competitive Equilibria With Limited Enforcement (2002)
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