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Constrained suboptimality in incomplete markets: a general approach and two applications

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  • Atsushi Kajii

    (Institute of Policy and Planning Sciences, University of Tsukuba, Ibaraki 305, JAPAN)

  • Antonio Villanacci

    (DIMADEFAS, Università degli Studi, I-50134 Firenze, ITALY)

  • Alessandro Citanna

    (GSIA, Carnegie Mellon University, Pittsburgh, PA 15213, USA)

Abstract

In this paper we re-examine generic constrained suboptimality of equilibrium allocations with incomplete numeraire asset markets. We provide a general framework which is capable of resolving some issues left open by the previous literature, and encompasses many kinds of intervention in partially controlled market economies. In particular, we establish generic constrained suboptimality, as studied by Geanakoplos and Polemarchakis, even without an upper bound on the number of households. Moreover, we consider the case where asset markets are left open, and the planner can make lump-sum transfers in a limited number of goods. We show that such a perfectly anticipated wealth redistribution policy, though consistent with the assumed incomplete financial structure, is typically effective.

Suggested Citation

  • Atsushi Kajii & Antonio Villanacci & Alessandro Citanna, 1998. "Constrained suboptimality in incomplete markets: a general approach and two applications," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 11(3), pages 495-521.
  • Handle: RePEc:spr:joecth:v:11:y:1998:i:3:p:495-521 Note: Received: August 14, 1995; revised version: April 11, 1997
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    JEL classification:

    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets

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