General equilibrium with endogenous uncertainty and default

We study the introduction of new assets that are defined in expected values rather than state by state. Individual default emerges naturally in an economy where such, assets are introduced without completing all contingency markets. We further provide conditions under which individual default is propagated endogenously into a collective risk of widespread default in general equilibrium. We prove existence of a general equilibrium with endogenous uncertainty. (c) 2006 Elsevier B.V. All rights reserved.