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Observability and optimality


  • Geanakoplos, J. D.
  • Polemarchakis, H. M.


Observability of an individual's excess demand function for assets and commodities as all prices and revenue vary suffices in order to recover his von Neumann-Morgenstern utility function. This is generically the case, even when the asset market is incomplete and the cardinal utility indices state dependent, as long as there are at least two commodities traded in spot markets at each state of nature. On the contrary, if the response of individuals' excess demand for assets as prices in spot commodity markets vary is not observable, recoverability fails when the asset market is incomplete. In particular, it is not possible to contradict the claim that the competitive allocation is fully optimal in spite of the incompleteness of the asset market.
(This abstract was borrowed from another version of this item.)
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Geanakoplos, J. D. & Polemarchakis, H. M., 1990. "Observability and optimality," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 153-165.
  • Handle: RePEc:eee:mateco:v:19:y:1990:i:1-2:p:153-165

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    References listed on IDEAS

    1. Philip Dybvig & Heraklis Polemarchakis, 1981. "Recovering Cardinal Utility," Review of Economic Studies, Oxford University Press, vol. 48(1), pages 159-166.
    2. Mas-Colell, Andreu, 1977. "The Recoverability of Consumers' Preferences from Market Demand Behavior," Econometrica, Econometric Society, vol. 45(6), pages 1409-1430, September.
    3. McLennan, Andrew, 1979. "Examples of Von Neumann-Morgenstern utility functions not recoverable from asset demands," Economics Letters, Elsevier, vol. 3(2), pages 149-152.
    4. 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.
    5. David M. G. Newbery & Joseph E. Stiglitz, 1984. "Pareto Inferior Trade," Review of Economic Studies, Oxford University Press, vol. 51(1), pages 1-12.
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    Cited by:

    1. Geanakoplos, John & Polemarchakis, H.M., 2008. "Pareto improving taxes," Journal of Mathematical Economics, Elsevier, vol. 44(7-8), pages 682-696, July.
    2. P. Herings & Herakles Polemarchakis, 2005. "Pareto improving price regulation when the asset market is incomplete," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 25(1), pages 135-154, January.
    3. Charles P. Thomas, 1995. "The Role of Fiscal Policy in an Incomplete Markets Framework," Review of Economic Studies, Oxford University Press, vol. 62(3), pages 449-468.
    4. Andrés Carvajal & Alvaro Riascos, 2004. "Global identification from the equilibrium manifold under incomplete markets," Royal Holloway, University of London: Discussion Papers in Economics 04/30, Department of Economics, Royal Holloway University of London, revised Nov 2004.
    5. Kubler, F. & Chiappori, P. -A. & Ekeland, I. & Polemarchakis, H. M., 2002. "The Identification of Preferences from Equilibrium Prices under Uncertainty," Journal of Economic Theory, Elsevier, vol. 102(2), pages 403-420, February.
    6. Tirelli, Mario, 2006. "The evaluation of public investments under uncertainty," Research in Economics, Elsevier, vol. 60(4), pages 188-198, December.
    7. Carvajal, Andres & Ray, Indrajit & Snyder, Susan, 2004. "Equilibrium behavior in markets and games: testable restrictions and identification," Journal of Mathematical Economics, Elsevier, vol. 40(1-2), pages 1-40, February.
    8. Herakles Polemarchakis, 2015. "Markets and Efficiency," The Japanese Economic Review, Japanese Economic Association, vol. 66(2), pages 150-166, June.
    9. Wettstein, David, 1995. "Incentives and competitive allocations in exchange economies with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 24(3), pages 201-216.
    10. KÜBLER, Felix & POLEMARCHAKIS, Heracles, 1999. "The identification of preferences from the equilibrium prices of commodities and assets," CORE Discussion Papers 1999033, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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