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The probability approach to general equilibrium with production


  • Michael Magill


  • Martine Quinzii



We develop an alternative approach to the general equilibrium analysis of a stochastic production economy when firms? choices of investment influence the probability distributions of their output. Using a normative approach we derive the criterion that a firm should maximize to obtain a Pareto optimal equilibrium: the criterion expresses the firm?s contribution to the expected social utility of output, and is not the linear criterion of market value. If firms do not know agents utility functions, and are restricted to using the information conveyed by prices then they can construct an approximate criterion which leads to a second-best choice of investment which, in examples, is found to be close to the first best.
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Suggested Citation

  • Michael Magill & Martine Quinzii, 2009. "The probability approach to general equilibrium with production," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 39(1), pages 1-41, April.
  • Handle: RePEc:spr:joecth:v:39:y:2009:i:1:p:1-41 DOI: 10.1007/s00199-008-0336-x

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    References listed on IDEAS

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    2. William R. Zame, 2007. "Incentives, Contracts, and Markets: A General Equilibrium Theory of Firms," Econometrica, Econometric Society, vol. 75(5), pages 1453-1500, September.
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    Cited by:

    1. Wozny Lukasz & Growiec Jakub, 2012. "Intergenerational Interactions in Human Capital Accumulation," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 12(1), pages 1-47, June.
    2. Balbus, Łukasz & Reffett, Kevin & Woźny, Łukasz, 2012. "Stationary Markovian equilibrium in altruistic stochastic OLG models with limited commitment," Journal of Mathematical Economics, Elsevier, vol. 48(2), pages 115-132.
    3. Magill, Michael & Quinzii, Martine, 2014. "Anchoring expectations of inflation," Journal of Mathematical Economics, Elsevier, vol. 50(C), pages 86-105.

    More about this item


    Optimal investment; Probability distribution of output; Equilibrium; D21; D51;

    JEL classification:

    • A1 - General Economics and Teaching - - General Economics
    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location


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