Asset prices, debt constraints and inefficiency

In this paper, we consider economies with (possibly endogenous)solvency constraints under uncertainty. Long-run inefficiency corresponds toa feasible redistribution yielding a welfare improvement beginning from everycontingency reached by the economy. A sort of Cass Criterion (Cass [11]) com-pletely characterizes long-run inefficiency. This criterion involves only observ-able prices and requires low interest rates in the long-run, exactly as it happensfor canonical inefficiency in economies of overlapping generations. In addition,when quantitative limits to liabilities arise from participation constraints, theexistence of a feasible welfare improvement, subject to participation, coincideswith the introduced notion of long-run inefficiency.