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 economyâ€™s endowments are collinear, its excess demand function will obey the weak axiom when certain mild restrictions are imposed on agentsâ€™ 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 economyâ€™s excess demand function obeys the weak axiom near an equilibrium price. Keywords: income effects, substitution effects, monotonicity, law of demand, weak axiom.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 2004-W18.
Date of creation: 01 Jul 2004
Date of revision:
income effects; substitution effects; monotonicity; law of demand; weak axiom.;
Other versions of this item:
- John Quah, 2004. "The aggregate weak axiom in a financial economy through dominant substitution effects," Economics Papers 2004-W18, Economics Group, Nuffield College, University of Oxford.
- 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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