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The probability approach to general equilibrium with production

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  • Michael Magill
  • Martine Quinzii

Abstract

We develop an alternative approach to the general equilibrium analysis of a stochastic production economy when firms? choices of investment influence the probability distributions of their output. Using a normative approach we derive the criterion that a firm should maximize to obtain a Pareto optimal equilibrium: the criterion expresses the firm?s contribution to the expected social utility of output, and is not the linear criterion of market value. If firms do not know agents utility functions, and are restricted to using the information conveyed by prices then they can construct an approximate criterion which leads to a second-best choice of investment which, in examples, is found to be close to the first best.
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  • Michael Magill & Martine Quinzii, 2009. "The probability approach to general equilibrium with production," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 39(1), pages 1-41, April.
    • Handle: RePEc:spr:joecth:v:39:y:2009:i:1:p:1-41
    DOI: 10.1007/s00199-008-0336-x
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    More about this item

    Keywords

    Optimal investment; Probability distribution of output; Equilibrium; D21; D51;
    All these keywords.

    JEL classification:

    • A1 - General Economics and Teaching - - General Economics
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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