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The perfect foresights' assumption revisited: the existence of equilibrium with multiple price expectations

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Our earlier papers had extend to asymmetric information the classical existence theorems of general equilibrium theory, under the standard assumption that agents had perfect foresights, that is, they knew, ex ante, which price would prevail on each spot market. Common observation suggests, however, that agents more often trade with an un-precise knowledge of future prices. We now let agents anticipate, in each random state, a set of plausible prices, called expectations, endowed with a probability distribution. These expectations are assumed to define a so-called "structure of beliefs", along which agents' expectations sets intersect on each spot market. We introduce a related concept of "correct foresights equilibrium" (CFE), in which equilibrium prices belong to all agents expectations sets. We prove that the existence of a CFE is still characterized by the no-arbitrage condition of finance. This result, which extends our earlier theorems, shows that private information or price uncertainty would not affect the existence but only the value of equilibrium prices and allocations

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  • Lionel De Boisdeffre, 2008. "The perfect foresights' assumption revisited: the existence of equilibrium with multiple price expectations," Documents de travail du Centre d'Economie de la Sorbonne b08104, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    • Handle: RePEc:mse:cesdoc:b08104
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    1. Bernard Cornet & Lionel Boisdeffre, 2009. "Elimination of arbitrage states in asymmetric information models," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(2), pages 287-293, February.
    2. Lionel Boisdeffre, 2007. "No-arbitrage Equilibria with Differential Information: An Existence Proof," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 31(2), pages 255-269, May.
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    More about this item

    Keywords

    General equilibrium; incomplete markets; asymmetric information; arbitrage; existence of equilibrium;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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