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Unawareness and bankruptcy: A general equilibrium model

Author

Listed:
  • Salvatore Modica

    (Universita` di Palermo, IMRO, I-98121 Palermo, ITALY)

  • J.-Marc Tallon

    (CNRS-MAD, Université Paris I, F-75634 Paris Cedex 13, FRANCE)

  • Aldo Rustichini

    (CentER, Tilburg University, P.O. Box 90153, NL-5000 LE Tilburg, THE NETHERLANDS)

Abstract

We present a consistent pure-exchange general equilibrium model where agents may not be able to foresee all possible future contingencies. In this context, even with nominal assets and complete asset markets, an equilibrium may not exist without appropriate assumptions. Specific examples are provided. An existence result is proved under the main assumption that there are sufficiently many states that all the agents foresee. An intrinsic feature of the model is bankruptcy, which agents may involuntarily experience in the unforeseen states.

Suggested Citation

  • Salvatore Modica & J.-Marc Tallon & Aldo Rustichini, 1998. "Unawareness and bankruptcy: A general equilibrium model," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 12(2), pages 259-292.
  • Handle: RePEc:spr:joecth:v:12:y:1998:i:2:p:259-292
    Note: Received: April 23, 1997; revised version: May 19, 1997
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    JEL classification:

    • D4 - Microeconomics - - Market Structure, Pricing, and Design
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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