# Economic Survival when Markets are Incomplete

## Abstract

We consider an infinite horizon economy with incomplete markets with two agents and one good. We begin with an example in which an agent's equilibrium consumption is zero eventually with probability one even if she has correct beliefs and is marginally more patient. We then prove the following general result: if markets are effectively incomplete forever then on any equilibrium path on which some agent's consumption is bounded away from zero eventually, the other agent's consumption is zero eventually. This implies that either some agent vanishes, in that she consumes zero eventually, or the consumption of both agents is arbitrarily close to zero infinitely often. Later we show that the first possibility is a robust outcome since for a wide class of economies with incomplete markets, there are equilibria in which an agent's consumption is zero eventually with probability one even though she has correct beliefs as in the example. Our results mark a sharp contrast with the case studied by Sandroni (2000) and Blume and Easley (2004) where markets are complete.(This abstract was borrowed from another version of this item.)

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## Bibliographic Info

Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 784828000000000422.

**Length:**

**Date of creation:**13 Sep 2005

**Date of revision:**

**Handle:**RePEc:cla:levarc:784828000000000422

**Contact details of provider:**

Web page: http://www.dklevine.com/

## Related research

**Keywords:**

**Other versions of this item:**

- Pablo F. Beker & Subir Chattopadhyay, 2006.
"
**Economic Survival When Markets Are Incomplete**," Working Papers. Serie AD 2006-19, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).

**Find related papers by JEL classification:**

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

**This paper has been announced in the following NEP Reports:**

- NEP-ALL-2006-03-18 (All new papers)
- NEP-FMK-2006-03-18 (Financial Markets)

## References

**References listed on IDEAS**

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## Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.**Cited by:**

- Brock, W.A. & Hommes, C.H. & Wagener, F.O.O., 2006.
"
**More hedging instruments may destabilize markets**," CeNDEF Working Papers 06-12, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.

- Brock, W.A. & Hommes, C.H. & Wagener, F.O.O., 2009.
"
**More hedging instruments may destabilize markets**," Journal of Economic Dynamics and Control, Elsevier, vol. 33(11), pages 1912-1928, November.

- Florian Wagener & Cars Hommes & William Brock, 2006.
"
**More hedging instruments may destabilize markets**," Working Papers wp06-11, Warwick Business School, Finance Group. - William Brock & Cars Hommes & Florian Wagener, 2006.
"
**More Hedging Instruments may destablize Markets**," Tinbergen Institute Discussion Papers 06-080/1, Tinbergen Institute, revised 30 Apr 2008.

- Brock, W.A. & Hommes, C.H. & Wagener, F.O.O., 2009.
"

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