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Non-Existence of Competitive Equilibria with Dynamically Inconsistent Preferences

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  • Gabrieli, Tommaso

    (Department of Economics, City University London and Institute of Economic Policy Catholic University of Milan)

  • Ghosal, Sayantan

    (Department of Economics, University of Warwick)

Abstract

This paper shows the robust non existence of competitive equilibria even in a simple three period representative agent economy with dynamically inconsistent preferences. We distinguish between a sophisticated and naive representative agent. Even when underlying preferences are monotone and convex, we show by example that the induced preferences, at given prices, of the sophisticated representative agent over choices in first period markets are both non convex and satiated. Therefore, even allowing for negative prices, the market clearing allocation is not contained in the convex hull of demand. Finally, with a naive representative agent, we show that perfect foresight is incompatible with market clearing and individual optimization at given prices.

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Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 900.

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Date of creation: 2009
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Handle: RePEc:wrk:warwec:900

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Keywords: dynamically inconsistent preferences ; competitive equilibrium ; existence ; satiation ; non convexity;

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  1. HERINGS, P. Jean-Jacques & ROHDE, Kirsten I.M., . "On the completeness of complete markets," CORE Discussion Papers RP -2153, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
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Cited by:
  1. Takeshi Ojima, 2013. "General equilibrium dynamics with naive and sophisticated hyperbolic consumers in an overlapping generations economy," ISER Discussion Paper 0886, Institute of Social and Economic Research, Osaka University.
  2. Takeshi Ojima, 2013. "General Equilibrium Dynamics with Naive and Sophisticated Hyperbolic Consumers in an Overlapping Generations Economy," ISER Discussion Paper 0886r, Institute of Social and Economic Research, Osaka University, revised Jan 2014.

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