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- Title
General equilibrium, preferences and financial institutions after the crisis.
- Authors
Araujo, Aloisio
- Abstract
The study is a review of some recent papers in general equilibrium that can be viewed as efforts to better understand the recent financial crisis. We begin by proposing a new set of preferences inspired by the new decision theoretical literature. In our main example, we use the concept of wariness which captures the idea of agents concerned with the worst case scenario. As a consequence, utility functions are weighted sums of a term with discounted future and another which concentrates in the worst period consumption. In this new context, we can have bubbles in a purely classical framework. In the second part of the paper, we change the classical budget set to allow for lack of commitment for the part of the agent. We analyze three different situations where this can happen. In the first one, agents can borrow only with collateral, represented by a durable good. In the second, we study bankruptcy laws where the whole firm is used as collateral, and in the third situation, the agents are punished by exclusion from the market. These three situations have the virtue of being real life based.
- Subjects
FINANCIAL institutions; ECONOMIC equilibrium; GLOBAL Financial Crisis, 2008-2009; UTILITY functions; BUDGET
- Publication
Economic Theory, 2015, Vol 58, Issue 2, p217
- ISSN
0938-2259
- Publication type
Article
- DOI
10.1007/s00199-014-0840-0