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Core Concepts for Incomplete Market Economies

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  • Helga Habis

    ()
    (Institute of Economics - Hungarian Academy of Sciences)

  • P. Jean-Jacques Herings

    ()
    (Department of Economics, Universiteit Maastricht)

Abstract

We examine the notion of the core when cooperation takes place in a setting with time and uncertainty. We do so in a two-period general equilibrium setting with incomplete markets. Market incompleteness implies that players cannot make all possible binding commitments regarding their actions at different date-events. We unify various treatments of dynamic core concepts existing in the literature. This results in definitions of the Classical Core, the Segregated Core, the Two-stage Core, the Strong Sequential Core, and the Weak Sequential Core. Except for the Classical Core, all these concepts can be defined by requiring absence of blocking in period 0 and at any date-event in period 1. The concepts only differ with respect to the notion of blocking in period 0. To evaluate these concepts, we study three market structures in detail: strongly complete markets, incomplete markets in finance economies, and incomplete markets in settings with multiple commodities. Even when markets are strongly complete, the Classical Core is argued not to be an appropriate concept. For the general case of incomplete markets, the Weak Sequential Core is the only concept that does not suffer from major defects.

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Bibliographic Info

Paper provided by Institute of Economics, Centre for Economic and Regional Studies, Hungarian Academy of Sciences in its series IEHAS Discussion Papers with number 1119.

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Length: 43 pages
Date of creation: May 2011
Date of revision:
Handle: RePEc:has:discpr:1119

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Keywords: Incomplete Markets; Dynamic Core Concepts; Time and uncertainty;

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References

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  1. Herings, P.J.J. & Polemarchakis, H.M., 1999. "Pareto Improving Price Regulation when the Asset Market is Incomplete," Discussion Paper 1999-30, Tilburg University, Center for Economic Research.
  2. Leonidas C. Koutsougeras, 1998. "A two-stage core with applications to asset market and differential information economies," Economic Theory, Springer, vol. 11(3), pages 563-584.
  3. Kajii Atsushi, 1994. "Anonymity and Optimality of Competitive Equilibria when Markets Are Incomplete," Journal of Economic Theory, Elsevier, vol. 64(1), pages 115-129, October.
  4. Grossman, Sanford J., 1977. "A characterization of the optimality of equilibrium in incomplete markets," Journal of Economic Theory, Elsevier, vol. 15(1), pages 1-15, June.
  5. P.J.J. Herings & H. Peeters, 2001. "The Strong Sequential Core for Two-period Economies," Microeconomics 0111002, EconWPA.
  6. Becker, Robert A & Chakrabarti, Subir K, 1995. "The Recursive Core," Econometrica, Econometric Society, vol. 63(2), pages 401-23, March.
  7. 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.
  8. Repullo, Rafael, 1988. "The Core of an Economy with Transaction Costs," Review of Economic Studies, Wiley Blackwell, vol. 55(3), pages 447-58, July.
  9. Laurence Kranich & Andrés Perea & Hans Peters, 2005. "Core Concepts For Dynamic Tu Games," International Game Theory Review (IGTR), World Scientific Publishing Co. Pte. Ltd., vol. 7(01), pages 43-61.
  10. Roth, Alvin E. & Postlewaite, Andrew, 1977. "Weak versus strong domination in a market with indivisible goods," Journal of Mathematical Economics, Elsevier, vol. 4(2), pages 131-137, August.
  11. P. Herings & A. Predtetchinski & A. Perea, 2006. "The Weak Sequential Core for Two-Period Economies," International Journal of Game Theory, Springer, vol. 34(1), pages 55-65, April.
  12. Repullo, Rafael, 1988. "A new characterization of the efficiency of equilibrium with incomplete markets," Journal of Economic Theory, Elsevier, vol. 44(2), pages 217-230, April.
  13. Gale, Douglas, 1978. "The core of a monetary economy without trust," Journal of Economic Theory, Elsevier, vol. 19(2), pages 456-491, December.
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Cited by:
  1. Habis, Helga, 2012. "Sztochasztikus csődjátékok - avagy hogyan osszunk szét egy bizonytalan méretű tortát?
    [Stochastic bankruptcy games. How can a cake of uncertain dimensions be divided?]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(12), pages 1299-1310.

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