Endogenous Default Penalties in Nominal Incomplete Markets

Nuno Gouveia

and

Abdelkrim Seghir

This paper endogeneizes the utility penalties, initiated by Dubey, Geanakoplos and Shubik (2005), by introducing a benevolent central planner choosing the value of marginal default utility penalties for each consumer. We also prove equilibrium existence with endogenous default penalties for incomplete markets with nominal assets.