On the completeness of complete markets
AbstractWe reconsider the allocational invariance of equilibria to different formulations of market completeness. We identify the so-far neglected assumption of sophisticated behavior as crucial to this result. The paper studies three market structures. First, the Arrow-Debreu setting is considered. Second, sequentially complete markets are analyzed, where goods on the spot markets and all contingent one-period ahead commodities can be traded in every state. Finally, complete markets are analyzed, where all possible contingent commodities can be traded at every state. Preferences may be time-consistent or time-inconsistent. A distinction is made between naÃ¯ve and sophisticated behavior. For economies with time-inconsistent preferences, Arrow-Debreu equilibria are not related to either sequentially complete equilibria or complete equilibria. It does hold that every equilibrium consumption that can be attained in sequentially complete markets, can also be attained in complete markets. An example shows that the converse is not true for naÃ¯ve economies. Finally, when preferences are restricted to be time-consistent and households are sophisticated, the three market structures yield the same equilibrium consumption. Surprisingly, for naÃ¯ve households, this result is not true, even when preferences are time-consistent.
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Bibliographic InfoPaper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers RP with number -2153.
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Note: In : Economic Theory, 37, 171-201, 2008
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- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
- D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
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