COWLES FOUNDATION FOR RESEARCH IN ECONOMICS
AT YALE UNIVERSITY

Box 208281
New Haven, CT 06520-8281

COWLES FOUNDATION DISCUSSION PAPER NO. 1539R

A Credit Mechanism for Selecting a Unique Competitive Equilibrium

Cheng-Zhong Qin
Department of Economics, University of California, Santa Barbara
Martin Shubik
Economics Department, Yale University

November 2005
Revised: June 2009

The enlargement of the general-equilibrium structure to allow default subject to penalties to appririate credit limits and default penalties results in a construction of a simple mechanism for a credit using society. We show that there generically exists a price-normalizing bundle that determines a credit money along with appropriate credit limmits and default penalties for a credit mechanism to select a unique competitive equilibrium (CE). With some additional conditions, a common credit money can be applied such that any CE can be a unique selection by the credit mechanism with appropriate credit limits default penalties for the traders. This will include a CE with the minimal cash flow penalty. Such CEs are special for the reason that we minimize the need for a substitute-for-trust (i.e. money) in trade

Keywords: Competitive equilibrium, Credit mechanism, Marginal utility of income, Welfare economics

JEL Classification: D5, C72, E4