Default and Exogenous Collateral in Incomplete Markets with a Continuum of States

Abstract We consider an economy with a finite number of agents, a continuum of states and incomplete markets where individuals do not keep their promises contrary to the Arrow–Debreu model of general equilibrium with complete markets (GE) and the general equilibrium model with incomplete markets (GEI) where they do keep them by assumption. We show that in addition to usual assumptions on utilities and endowments the equilibrium for this economy must exist if sales of assets are backed by some nonzero collateral.