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Constrained inefficiency in GEI: a geometric argument

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  • Mario Tirelli

Abstract

In this paper we use global analysis to study the welfare properties of general equilibrium economies with incomplete markets (GEI). Our main result is to show that constrained Pareto optimal equilibria are contained in a submanifold of the equilibrium set. This result is explicitly derived for economies with real assets and xed aggregate resources, of which real numeraire assets are a special case. As a by product of our analysis, we propose an original global parametrization of the equilibrium set that generalizes to incomplete markets the classical one, rst, proposed by Lange (1942).

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Bibliographic Info

Paper provided by Department of Economics - University Roma Tre in its series Departmental Working Papers of Economics - University 'Roma Tre' with number 0086.

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Length: 26
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:rtr:wpaper:0086

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Keywords: General equilibrium; incomplete markets; optimality; global analysis;

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  1. Siconolfi, P & Villanacci, A, 1991. "Real Indeterminacy in Incomplete Financial Market Economies without Aggregate Risk," Economic Theory, Springer, vol. 1(3), pages 265-76, July.
  2. Zhou, Yuqing, 1997. "The structure of the pseudo-equilibrium manifold in economies with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 27(1), pages 91-111, February.
  3. Grossman, Sanford J & Hart, Oliver D, 1979. "A Theory of Competitive Equilibrium in Stock Market Economies," Econometrica, Econometric Society, vol. 47(2), pages 293-329, March.
  4. 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.
  5. Geanakoplos, J. & Magill, M. & Quinzii, M. & Dreze, J., . "Generic inefficiency of stock market equilibrium when markets are incomplete," CORE Discussion Papers RP -916, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. John Geanakoplos, 1997. "An Introduction to General Equilibrium with Incomplete Asset Markets," Levine's Working Paper Archive 1115, David K. Levine.
  7. Stiglitz, Joseph E, 1982. "The Inefficiency of the Stock Market Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 241-61, April.
  8. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics, in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
  9. Zhou, Yuqing, 1997. "Genericity Analysis on the Pseudo-Equilibrium Manifold," Journal of Economic Theory, Elsevier, vol. 73(1), pages 79-92, March.
  10. Geanakoplos, John, 1990. "An introduction to general equilibrium with incomplete asset markets," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 1-38.
  11. Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December.
  12. Balasko, Yves & Cass, David, 1989. "The Structure of Financial Equilibrium with Exogenous Yields: The Case of Incomplete Markets," Econometrica, Econometric Society, vol. 57(1), pages 135-62, January.
  13. Michael Magill & Martine Quinzii, 2010. "general equilibrium with incomplete markets," The New Palgrave Dictionary of Economics, Palgrave Macmillan.
  14. Radner, Roy, 1972. "Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of Markets," Econometrica, Econometric Society, vol. 40(2), pages 289-303, March.
  15. 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.
  16. Werner, Jan, 1991. "On Constrained Optimal Allocations with Incomplete Markets," Economic Theory, Springer, vol. 1(2), pages 205-09, April.
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Cited by:
  1. Mario Tirelli & Sergio Turner, 2008. "A social welfare function characterizing competitive equilibria of incomplete financial markets," Working Papers 2008-10, Brown University, Department of Economics.

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