On Bankruptcy in General Equilibrium with Uncertainty

In a general equilibrium model with time and uncertainty the possibility of bankruptcy cannot be excluded in general, when short sale constraints are too loose. Tight short trading constraints, on the other hand, are inefficient. Bankruptcies turn security payoffs endogenous and destroy
convexity of the induced preferences over portfolios. The latter raises existence issues for competitive equilibrium, as illustrated in this paper by an example.