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