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Equilibrium Selections

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Author Info

  • ALLEN, Beth

    (Department of Economics, Universit.y of Minnesota and Federal Reserve Bank of Minneapolis)

  • DUTTA , Jayasri

    (Faculty of Economics and Politics, University of Cambridge)

  • POLEMARCHAKIS , Heracles

    (CORE, Université catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium)

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    Abstract

    This paper analyses the impact of multiple competitive equilibria and complete markets in a simple general equilibrium model. A random selection from the equilibrium correspondence of a finite exchange economy defines probability distributions on equilibrium prices. Asset markets allow traders to insure against the resulting uncertainty. If asset markets are complete, equilibrium selections are necessarily degenerate. The selection cannot be non- trivially random, and must assign probability one to particular equilibrium price vectors. In this case, asset prices reveal the choice of equilibrium price vectors and achieve the coordination of traders' expectations. If the asset market is incomplete, equilibrium selections can be non-degenerate, so that price uncertainty is self-fulfilling. A fully insured random selection defines an iterative procedure of reallocations which is Pareto improving at each step. The process converges to a Pareto optimum in finitely many steps. The key requirement is that the random selection be continuous, which is a generic condition for smooth exchange economies with strictly concave utility functions.

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    Bibliographic Info

    Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 1994071.

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    Date of creation: 01 Dec 1994
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    Handle: RePEc:cor:louvco:1994071

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    Related research

    Keywords: multiple equilibria; random selections; asset markets; rational expectations; convergence;

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    Cited by:
    1. Jayasri Dutta & Stephen Morris, . "The Revelation of Information and Self-Fulfilling Beliefs," Penn CARESS Working Papers 269cceedcbd401a5e46548b88, Penn Economics Department.

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