CFDP 1539R

A Credit Mechanism for Selecting a Unique Competitive Equilibrium


Publication Date: November 2005

Revision Date: June 2009

Pages: 21


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.


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

JEL Classification Codes:  D5, C72, E4