The aggregate weak axiom in a financial economy through dominant substitution effects
AbstractConsider a two period financial economy with incomplete markets and with agents having von Neumann-Morgenstern utility functions. It is well known that when the economys endowments are collinear, the excess demand function will obey the weak axiom when certain mild restrictions are imposed on agents coefficient of relative risk aversion. This result is obtained through the application of a theorem on the law of demand (for individual demand) formulated independently by Milleron (1974) and Mitjuschin and Polterovich (1978). In this paper, we develop their arguments further and apply them to economies without collinear endowments. We identify conditions which guarantee that the economys excess demand function obeys the weak axiom near an equilibrium price.
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Bibliographic InfoPaper provided by Economics Group, Nuffield College, University of Oxford in its series Economics Papers with number 2004-W18.
Length: 37 pages
Date of creation: 01 Aug 2004
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Web page: http://www.nuff.ox.ac.uk/economics/
Other versions of this item:
- John Quah, 2004. "The Aggregate Weak Axiom in a Financial Economy through Dominant Substitution Effects," Economics Series Working Papers 2004-W18, University of Oxford, Department of Economics.
- D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
- D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
- D51 - Microeconomics - - General Equilibrium and Disequilibrium - - - Exchange and Production Economies
- D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
- G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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