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Contractual Arrangements for Intertemporal Trade

Contractual Arrangements for Intertemporal Trade

Edward C. Prescott
Neil Wallace
Copyright Date: 1987
Edition: NED - New edition
Pages: 176
  • Book Info
    Contractual Arrangements for Intertemporal Trade
    Book Description:

    Contractual Arrangements for Intertemporal Trade was first published in 1987. The seven papers in this volume were presented at a conference at the University of Minnesota in 1984. They deal with various aspects of the specialness of intertemporal trade by studying environments in which such trade is more difficult to carry out than is trade in the standard general equilibrium model. Most of the papers impose difficulties in the form of private information or spatial separation linked with private information. The focus on intertemporal trade was motivated by observations related to such trade that seem anomalous from the point of view of the standard general equilibrium model: the semming incompleteness of risk-sharing markets, the existence of intermediaries, the occurrence of financial panics and run on banks, and the relatively heavy regulation of credit markets. Contributors: Edward J. Green, Charles J. Jacklin, Bruce D. Smith, Sudipto Bhattacharya, Kathleen Hagerty, Robert Townsend, Neil Wallace, Lawrence M. Benveniste, Edward C. Prescott, and John H. Boyd.

    eISBN: 978-0-8166-5574-8
    Subjects: Economics

Table of Contents

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  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-v)
  3. Contributors
    (pp. vi-vi)
  4. Preface
    (pp. vii-x)
    E. C. P. and N. W.
  5. I Lending and the Smoothing of Uninsurable Income
    (pp. 3-25)
    Edward J. Green

    During the course of its lifetime, a typical household experiences considerable fluctuation in its level of consumption.¹ Some of this fluctuation is attributable to changes in aggregate economic conditions, but a substantial part is idiosyncratic. That is, much of the fluctuation of consumption over time for eachindividualhousehold corresponds to random variationamonghouseholds at each particular time.² In a large economy, this variation among households could be eliminated (in per capita terms, at least) by pooling the consumption of households that were comparable ex ante. Such pooling would smooth the consumption of each individual household not only across...

  6. II Demand Deposits, Trading Restrictions, and Risk Sharing
    (pp. 26-47)
    Charles J. Jacklin

    In recent papers, Diamond and Dybvig (1983) and Bryant (1980) develop models of banking to explore bank runs and their prevention.¹ Although the focus of these papers is bank runs, both identify the demand deposit as a mechanism that facilitates risk sharing. Bryant (1980) characterizes the demand deposit as providing "insurance" for an otherwise uninsurable event. Diamond and Dybvig (p. 402) state that "banks issuing demand deposits can improve on a competitive market by providing better risk sharing. . . . " These authors raise an important issue—the role of demand deposits in risk sharing. But, given they are...

  7. III Private Information, the Real Bills Doctrine, and the Quantity Theory: An Alternative Approach
    (pp. 48-80)
    Bruce D. Smith

    One of the longest continuing discussions in economics has involved the role that financial intermediaries (banks) play in allocating resources and expediting the undertaking of "monetary" transactions.¹ This discussion has most often manifested itself in the debates between adherents of the "real bills doctrine" and of the "quantity theory." The first of these positions has often been interpreted as an advocacy of "unfettered private intermediaries" (Sargent and Wallace 1982, 1212), and the second as an advocacy of 100 percent reserve requirements—or, more generally, of legal restrictions on intermediaries that restrict their ability to "create money." As argued by Sargent...

  8. IV Dealerships, Trading Externalities, and General Equilibrium
    (pp. 81-104)
    Sudipto Bhattacharya and Kathleen Hagerty

    In an important recent paper, Diamond (1982) has analyzed production-exchange equilibria in a model of search.¹ Trading "externalities" in this model arise from the specification that the likelihood of consummating trade per period is monotonically related to the proportion of agents having goods to trade. The probability of trading per period in turn feeds back to determine agents’ optimal production decisions. Diamond shows that this combination of the trading externality and the feedback effect can create a multiplicity of Nash equilibria, which are ordered in welfare and employment levels by the Pareto criterion. In Diamond (1982) and Diamond and Fudenberg...

  9. V Circulating Private Debt: An Example with a Coordination Problem
    (pp. 105-120)
    Robert Townsend and Neil Wallace

    A seemingly central observation for monetary economics is that some objects—often referred to as monies—appear in exchange much more frequently than other objects.¹ In this paper, we present and study a model that generates a version of this observation for private securities; in the model, some securities get traded frequently, or circulate, whereas others do not. In this and other respects, the securities in our model resemble historically observed bills of exchange.

    The model that we use to explain the existence of circulating securities is one of intertemporal trade in spatially and informationally separated markets. The assumption that...

  10. VI Incomplete Market Participation and the Optimal Exchange of Credit
    (pp. 121-145)
    Lawrence M. Benveniste

    In our modern economic system, financial intermediaries (with the aid of computers and modern communications) coordinate the exchange of credit between large numbers of seemingly anonymous individuals.¹ We are moving ever more closely to the paradigm of the Walrasian auctioneer.

    However, there are limits to the information capacity of any one organization. Thousands of financial intermediaries exchange excess credit balances among themselves, and these transactions are not coordinated by a central auctioneer. In essence, we have refined the historical financial institution in which individuals traded personalized lOUs whose value was backed by a promise to repay the bearer a predetermined...

  11. VII Dynamic Coalitions, Growth, and the Firm
    (pp. 146-160)
    Edward C. Prescott and John H. Boyd

    In this study, we explore the implications of a dynamic coalition production technology in an equilibrium environment.¹ There are three major implications. One is that, even without exogenous technological change, with this technology there can be sustained growth in an economy’s per capita output. Economies that are identical except for their initial capital endowments grow at the same constant percentage rate; output in such economies does not tend to converge to the same level or to diverge. Another implication is that, although firm size is variable, it does not tend to regress to the mean size nor does the size...

  12. Back Matter
    (pp. 161-161)