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A social welfare function characterizing competitive equilibria of incomplete financial markets

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  • Tirelli, Mario
  • Turner, Sergio

Abstract

A classic characterization of competitive equilibria views them as feasible allocations maximizing a weighted sum of utilities. It has been applied to establish fundamental properties of the equilibrium notion, such as existence, determinacy, and computability. However, it fails for economies with missing financial markets. We give such a characterization for economies with a single commodity and missing financial markets, by an amended social welfare function. Its parameters capture both the relative importance of households welfare, through the classic welfare weights, as well as the disagreements among them as to the value of the missing markets. As a by-product, we identify the dimension of the set of interior equilibrium allocations.

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  • Tirelli, Mario & Turner, Sergio, 2010. "A social welfare function characterizing competitive equilibria of incomplete financial markets," Research in Economics, Elsevier, vol. 64(1), pages 58-65, March.
    • Handle: RePEc:eee:reecon:v:64:y:2010:i:1:p:58-65
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    More about this item

    Keywords

    Incomplete markets Social welfare function General equilibrium Efficiency;

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis

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