Abstract
We study the effect of asset shortages on liquidity in economies with limited enforcement of debt contracts. We establish that, under a suitable assumption in terms of gains from trade, liquidity does not dry up and trading volumes do not disappear as credit conditions worsen. The equilibrium outcome becomes arbitrarily close to a purely speculative equilibrium, and bubbles occur in the limit. The result applies to incomplete markets and, more generally, to equilibria where collateral constraints interfere with the additivity of the payoff pricing functional.
Original language | English (US) |
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Pages (from-to) | 952-990 |
Number of pages | 39 |
Journal | Journal of Economic Theory |
Volume | 183 |
DOIs | |
State | Published - Sep 2019 |
Keywords
- Collateral
- Conditional efficiency
- Credit
- Liquidity
- Speculative bubble
ASJC Scopus subject areas
- Economics and Econometrics