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On the Completeness of Complete Markets

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  • Herings,P. Jean-Jacques
  • Rohde,Kirsten I.M.

    (METEOR)

Abstract

We 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 naïve 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 naïve 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 naïve households, this result is not true, even when preferences are time-consistent.

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Bibliographic Info

Paper provided by Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization in its series Research Memoranda with number 053.

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Date of creation: 2004
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Handle: RePEc:dgr:umamet:2004053

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Web page: http://www.maastrichtuniversity.nl/web/UMPublications.htm

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Keywords: microeconomics ;

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  1. George Loewenstein, Ted O'Donoghue and Matthew Rabin., 2000. "Projection Bias in Predicting Future Utility," Economics Working Papers E00-284, University of California at Berkeley.
  2. DRÈZE, Jacques & HERINGS, Jean-Jacques, 2003. "Sequentially complete markets remain incomplete," CORE Discussion Papers 2003085, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. P. Herings & Kirsten Rohde, 2006. "Time-inconsistent preferences in a general equilibrium model," Economic Theory, Springer, vol. 29(3), pages 591-619, November.
  4. Haller, Hans, 1990. "Non-market reopening, time-consistent plans and the structure of intertemporal preferences," Economics Letters, Elsevier, vol. 32(1), pages 1-5, January.
  5. Hellwig, Martin F., 1983. "A note on the implementation of rational expectations equilibria," Economics Letters, Elsevier, vol. 11(1-2), pages 1-8.
  6. Chattopadhyay, Subir & Gottardi, Piero, 1999. "Stochastic OLG Models, Market Structure, and Optimality," Journal of Economic Theory, Elsevier, vol. 89(1), pages 21-67, November.
  7. Donaldson, John B. & Selden, Larry, 1981. "Arrow-Debreu preferences and the reopening of contingent claims markets," Economics Letters, Elsevier, vol. 8(3), pages 209-216.
  8. Erzo G. J. Luttmer & Thomas Mariotti, 2003. "Subjective Discounting in an Exchange Economy," Journal of Political Economy, University of Chicago Press, vol. 111(5), pages 959-989, October.
  9. Bergstrom, Theodore C., 1975. "Maximal elements of acyclic relations on compact sets," Journal of Economic Theory, Elsevier, vol. 10(3), pages 403-404, June.
  10. Svensson, Lars E. O., 1976. "Sequences of temporary equilibria, stationary point expectations, and Pareto efficiency," Journal of Economic Theory, Elsevier, vol. 13(2), pages 169-183, October.
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Cited by:
  1. Maniquet, François, 2008. "Social orderings for the assignment of indivisible objects," Open Access publications from Université catholique de Louvain info:hdl:2078.1/28749, Université catholique de Louvain.
  2. Ana, MAULEON & Vincent, VANNETELBOSCH, 2005. "Market Integration and Strike Activity," Discussion Papers (ECON - Département des Sciences Economiques) 2005025, Université catholique de Louvain, Département des Sciences Economiques.
  3. Herings, P. Jean-Jacques & Mauleon, Ana & Vannetelbosch, Vincent, 2006. "Farsightedly Stable Networks," Research Memoranda 041, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization.
  4. MAULEON, Ana & SONG, Huasheng & VANNETELBOSCH, Vincent, 2006. "Networks of free trade agreements among heterogeneous countries," CORE Discussion Papers 2006053, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  5. Caruso, Geoffrey, 2009. "Space-time patterns of urban sprawl, a 1D cellular automata and microeconomic approach," Open Access publications from Université catholique de Louvain info:hdl:2078.1/28730, Université catholique de Louvain.
  6. Thisse, Jacques-François, 2010. "Toward a unified theory of economic geography an urban economics," Open Access publications from Université catholique de Louvain info:hdl:2078.1/30406, Université catholique de Louvain.
  7. Dembour, Carole, 2009. "Investment in public infrastructure with spillovers and tax competition between contiguous regions," Open Access publications from Université catholique de Louvain info:hdl:2078.1/28497, Université catholique de Louvain.
  8. Peeters, Dominique, 2009. "Network autocorrelation," Open Access publications from Université catholique de Louvain info:hdl:2078.1/28748, Université catholique de Louvain.

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