A NEGISHI'S APPROACH TO COMPETITIVE EQUILIBRIUM WITH RISK OF DEFAULT

Abstract. We study competitive equilibrium in sequential economies under limited commitment. Default induces permanent exclusion from financial mar-kets and endogenously determined solvency constraints prevent debt repudia-tion. We establish Welfare Theorems under a weaker notion of constrained efficiency, inspired by Malinvaud, corresponding to the absence of welfare improving feasible redistributions over finite (though indefinite) horizons. A Negishi’s Method permits to show that, for any arbitrary value of social welfare in between autarchy and constrained optimality, there exists an equilibrium attaining that value. This method is also exploited to verify equilibrium inde-