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A social welfare function characterizing competitive equilibria of incomplete financial markets

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  • Mario Tirelli
  • Sergio Turner

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 ? nancial markets. We give such a characterization for economies with missing ?nancial markets, by an amended social welfare function. Its parameters capture both the relative importance of households?welfare?the classic 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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Bibliographic Info

Paper provided by Brown University, Department of Economics in its series Working Papers with number 2008-10.

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Date of creation: 2008
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Handle: RePEc:bro:econwp:2008-10

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Postal: Department of Economics, Brown University, Providence, RI 02912

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Keywords: incomplete markets; social welfare function; manifold;

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  1. Timothy J Kehoe & David K Levine, 1985. "Comparative Statics and Perfect Foresight in Infinite Horizon Economies," Levine's Working Paper Archive 1873, David K. Levine.
  2. Atsushi Kajii & Antonio Villanacci & Alessandro Citanna, 1998. "Constrained suboptimality in incomplete markets: a general approach and two applications," Economic Theory, Springer, vol. 11(3), pages 495-521.
  3. DEBREU, Gérard, . "Smooth preferences," CORE Discussion Papers RP -132, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  4. Mario Tirelli, 2008. "Constrained inefficiency in GEI: a geometric argument," Departmental Working Papers of Economics - University 'Roma Tre' 0086, Department of Economics - University Roma Tre.
  5. Debreu, Gerard, 1976. "Smooth Preferences: A Corrigendum," Econometrica, Econometric Society, vol. 44(4), pages 831-32, July.
  6. Stiglitz, Joseph E, 1982. "The Inefficiency of the Stock Market Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 241-61, April.
  7. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
  8. Siconolfi, P & Villanacci, A, 1991. "Real Indeterminacy in Incomplete Financial Market Economies without Aggregate Risk," Economic Theory, Springer, vol. 1(3), pages 265-76, July.
  9. Radner, Roy, 1972. "Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of Markets," Econometrica, Econometric Society, vol. 40(2), pages 289-303, March.
  10. Mantel, Rolf R, 1971. "The Welfare Adjustment Process: Its Stability Properties," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 12(3), pages 415-30, October.
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