Bankruptcy and optimality in a closed trading mass economy modelled as a non-cooperative game
TL;DR: In this paper, the authors established the existence of an optimal bankruptcy rule which enables them to describe the Walrasian trading economy as a game with trade in fiat money, and the non-cooperative equilibrium points of this game which (in terms of prices and the final allocation yielded) include the competitive equilibrium points, when the bankruptcy rule is different from optimal.
About: This article is published in Journal of Mathematical Economics.The article was published on 1979-07-01. It has received 28 citations till now. The article focuses on the topics: Non-cooperative game & Repeated game.
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TL;DR: In this paper, the authors extend the standard model of general equilibrium with incomplete markets (GEI) to allow for default, and they show that default is reasonably modeled as an equilibrium phenomenon.
Abstract: We extend the standard model of general equilibrium with incomplete markets (GEI) to allow for default. Default can be either strategic, or due to ill-fortune. Agents who default are penalized to a degree proportional to the size of their default and to penalty parameters lambda. We find that under conditions similar to those necessary to guarantee the existence of GEI equilibrium, we get the existence of GEI_{lambda} equilibrium, for any lambda > 0. We argue that default is thus reasonably modeled as an equilibrium phenomenon. Moreover, we show that more lenient lambda which encourage default may be Pareto improving because they allow for better risk spreading. When default occurs, the Modigliani-Miller theorem typically fails to hold in our framework.
103 citations
TL;DR: In the presence of utility penalties, collateral requirements do not always eliminate the occurrence of Ponzi schemes, but in this event, loans can be larger than collateral costs and PonzI schemes become possible.
36 citations
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..., Kehoe and Levine (1993), Magill and Quinzii (1994, 1996) , Hernandez and Santos (1996))....
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TL;DR: In this article, the authors study stationary Markov equilibria for strategic, competitive games, in a market-economy model with one non-durable commodity, fiat money, borrowing/lending through a central bank or a money market, and a continuum of agents.
33 citations
Posted Content•
TL;DR: A sketch of a game theoretic and game-theoretic approach to the development of an appropriate microeconomic theory of money and financial institutions is given in this paper, where the basic purpose of the approach adopted here is to show the minimal conditions which require that financial institutions and instruments emerge as a necessary carriers of process.
Abstract: This is a sketch of a game theoretic and gaming approach to the development of an appropriate microeconomic theory of money and financial institutions The phrase "money and financial institutions" is used to stress that a theory of money alone cannot be fruitfully constructed in an institutional vacuum The monetary and financial system of an economy are part of the socio-politico-economic control mechanism used by every state to connect the economy with the polity and society This neural network provides the administrative means to collect taxes, direct investment, provide public goods, trade The money measures provide a crude but serviceable basis for the accounting system which in turn, along with the codification of commercial law and financial regulation are the basis for economic evaluation and the measurement of trust and fiduciary responsibility among the economic agents A central feature of a control mechanism is that it is designed to influence process Dynamics is its natural domain Equilibrium is not the prime concern, the ability to control the direction of motion is what counts Bagehot (1962) noted that a financial instrument originally designed for one purpose may take on a life of its own and serve a different purpose In particular most of the instruments may have been invented to facilitate trade but they provided a means for control Money and financial institutions provide the command and control system of a modern society The study of the mechanism, how they are formed, how they are controlled and manipulated and how their influence is measured in terms of social, political, and economic purpose pose questions not in pure economics, not even in a narrow political economy, but in the broad compass of a political economy set in the context of society A basic purpose of the approach adopted here is to show the minimal conditions which require that financial institutions and instruments emerge as a necessary carriers of process The thrust is for the development of a mathematical institutional economics
32 citations
01 Jan 1986
TL;DR: In the history of neoclassical economic theory, there have been two major categories of rejoinders to critics of the theory: one, that the critics did not adequately understand the structure of the theories, and thus mistook for essential what was merely convenient; or two, that criticism was old hat, and had been rendered harmless by recent (and technically abstruse) innovations with which the critic was unacquainted.
Abstract: In the history of neoclassical economic theory, there have been two major categories of rejoinders to critics of the theory: one, that the critics did not adequately understand the structure of the theory, and thus mistook for essential what was merely convenient; or two, that the criticism was old hat, and had been rendered harmless by recent (and technically abstruse) innovations with which the critic was unacquainted.1 The freedom of passage between these defenses has proven to be the bane of not only those opposed to neoclassicism, but also of those who have felt the need for reform and reformulation of economic theory from within. It has fostered the impression that, with enough ingenuity, any arbitrary phenomenon can be incorporated within the ambit of conventional neoclassical theory, therefore rendering any particular change in “assumptions” as innocuous as any other, and thus rendering them all equally arbitrary.
27 citations
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TL;DR: In this article, a general non-cooperative trading equilibrium is described in which prices depend in a natural way on the buying and selling decisions of the traders, avoiding the classical assumption that individuals must regard prices as fixed.
Abstract: A general model of noncooperative trading equilibrium is described in which prices depend in a natural way on the buying and selling decisions of the traders, avoiding the classical assumption that individuals must regard prices as fixed. The key to the approach is the use of a single, specified commodity as "cash," which may or may not have intrinsic value. The model, in several variants, is treated as a noncooperative game, in the spirit of Nash and Cournot. The rules of the game, including the price-forming mechanism, are independent of behavioral or equilibrium assumptions, which enter, instead, through the solutions of the game.
644 citations
TL;DR: In this paper, it is proved that in a market consisting of a continuum of traders, each one individually insignificant, there is always a competitive equilibrium, even when the preferences are not convex.
Abstract: : It is well known, and easy to establish, that there exist markets that do not have competitive equilibria, provided the traders do not have convex preferences--that is, that the set of commodity bundles preferred or indifferent to a given bundle is not always convex. It is proved, nevertheless, that in a market consisting of a continuum of traders, each one individually insignificant, there is always a competitive equilibrium, even when the preferences are not convex. (Author)
460 citations
209 citations
01 Sep 1977
TL;DR: In this paper, an outside bank, and borrowing are considered explicitly and the meaning of an optimal bankruptcy rule are considered, and the authors deal primarily with problems in modelling and interpretation of a monetary economy.
Abstract: Abstract : In several previous papers models of a monetary economy have been solved as a noncooperative game. The problem of granting credit and the possibility of bankruptcy was avoided by the artifact of considering that all traders were supplied with 'enough' of a commodity serving as a 'money' or means of payment so that there was no need to borrow. In this paper an outside bank, and borrowing are considered explicitly and the meaning of an optimal bankruptcy rule are considered. This paper deals primarily with problems in modelling and interpretation.
178 citations
Book•
03 Dec 1999
TL;DR: The second volume in a three-volume exposition of Martin Shubik's vision of "mathematical institutional economics" is as discussed by the authors, where the authors develop a process-oriented theory of money and financial institutions that reconciles micro- and macroeconomics, using as a prime tool the theory of games in strategic and extensive form.
Abstract: This is the second volume in a three-volume exposition of Martin Shubik's vision of "mathematical institutional economics" -- a term he coined in 1959 to describe the theoretical underpinnings needed for the construction of an economic dynamics The goal is to develop a process-oriented theory of money and financial institutions that reconciles micro- and macroeconomics, using as a prime tool the theory of games in strategic and extensive form The approach involves a search for minimal financial institutions that appear as a logical, technological, and institutional necessity, as part of the "rules of the game" Money and financial institutions are assumed to be the basic elements of the network that transmits the sociopolitical imperatives to the economy Volume 1 deals with a one-period approach to economic exchange with money, debt, and bankruptcy Volume 2 explores the new economic features that arise when we consider multi-period finite and infinite horizon economies Volume 3 will consider the specific role of financial institutions and government, and formulate the economic financial control problem linking micro- and macroeconomics
141 citations