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Competitive equilibria with limited enforcement |
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| Authors: | Patrick J Kehoe Fabrizio Perri |
| Institution: | a Research Department, Federal Reserve Bank of Minneapolis, 90 Hennepin Avenue, Minneapolis, MN 55401-2171, USA b Department of Economics, University of Minnesota, 271 19th Avenue South, Minneapolis, MN 55455-0421, USA c National Bureau of Economic Research, 1050 Massachusetts Avenue, Cambridge, MA 02138-5398, USA d Stern School of Business, New York University, 44 West 4th Street, New York, NY 10012-1106, USA e Centre for Economic Policy Research, 90-98 Goswell Road, London EC1V 7RR, UK |
| 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: | D5 E21 E32 E44 F3 F34 |
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