Economic Survival when Markets are Incomplete
We consider an infinite horizon economy with incomplete markets with two agents and one good. We begin with an example in which an agent's equilibrium consumption is zero eventually with probability one even if she has correct beliefs and is marginally more patient. We then prove the following general result: if markets are effectively incomplete forever then on any equilibrium path on which some agent's consumption is bounded away from zero eventually, the other agent's consumption is zero eventually. This implies that either some agent vanishes, in that she consumes zero eventually, or the consumption of both agents is arbitrarily close to zero infinitely often. Later we show that the first possibility is a robust outcome since for a wide class of economies with incomplete markets, there are equilibria in which an agent's consumption is zero eventually with probability one even though she has correct beliefs as in the example. Our results mark a sharp contrast with the case studied by Sandroni (2000) and Blume and Easley (2004) where markets are complete.
(This abstract was borrowed from another version of this item.)
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Length:  
Date of creation:  13 Sep 2005 
Date of revision:  
Handle:  RePEc:cla:levarc:784828000000000422 
Contact details of provider:  Web page: http://www.dklevine.com/

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
 Lawrence Blume & David Easley, 2001.
"If You're So Smart, Why Aren't You Rich? Belief Selection in Complete and Incomplete Markets,"
Working Papers
0106031, Santa Fe Institute.
 Lawrence Blume & David Easley, 2006. "If You're so Smart, why Aren't You Rich? Belief Selection in Complete and Incomplete Markets," Econometrica, Econometric Society, vol. 74(4), pages 929966, 07.
 Larry Blume & David Easley, 2001. "If You're So Smart, Why Aren't You Rich? Belief Selection in Complete and Incomplete Markets," Cowles Foundation Discussion Papers 1319, Cowles Foundation for Research in Economics, Yale University.
 Magill,Michael & Quinzii,Martine, 1992.
"Infinite horizon,Incomplete markets,"
Discussion Paper Serie A
384, University of Bonn, Germany.
 Magill, Michael & Quinzii, Martine, 1994. "Infinite Horizon Incomplete Markets," Econometrica, Econometric Society, vol. 62(4), pages 85380, July.
 Magill, M. & Quinzii, M., 1992. "Infinite Horizon Incomplete Markets," DELTA Working Papers 9226, DELTA (Ecole normale supérieure).
 Magill, M. & Quinzii, M., 1993. "Infinite Horizon Incomplete Markets," Papers 9320, Southern California  Department of Economics.
 Magill, M. & Quinzii, M., 1992. "Infinite Horizon Incomplete Markets," Papers 413a, California Davis  Institute of Governmental Affairs.
 David K. Levine & William R. Zame, 2002.
"Does Market Incompleteness Matter?,"
Econometrica,
Econometric Society, vol. 70(5), pages 18051839, September.
 David K. Levine & William Zame, 2001. "Does Market Incompleteness Matter," Levine's Working Paper Archive 78, David K. Levine.
 Sandroni, Alvaro, 2005. "Market selection when markets are incomplete," Journal of Mathematical Economics, Elsevier, vol. 41(12), pages 91104, February.
 Florenzano, Monique & Gourdel, Pascal, 1993.
"Incomplete markets in infinite horizon : debt constraints versus node prices,"
CEPREMAP Working Papers (Couverture Orange)
9329, CEPREMAP.
 Monique Florenzano & Pascal Gourdel, 1996. "Incomplete Markets In Infinite Horizon: Debt Constraints Versus Node Prices," Mathematical Finance, Wiley Blackwell, vol. 6(2), pages 167196.
 Gourdel, Pascual & Florenzano, Monique, 1995. "Incomplete markets in infinite horizon: debt constraints versus node prices," UC3M Working papers. Economics 3904, Universidad Carlos III de Madrid. Departamento de Economía.
 Florenzano, M. & Gourdel, P., 1994. "Incomplete Markets in Infinite Horizon: Debt Constraints Versus Node Prices," Papiers d'Economie MathÃ©matique et Applications 94.76, UniversitÃ© PanthÃ©onSorbonne (Paris 1).
 Krebs, Tom, 2004. "Testable implications of consumptionbased asset pricing models with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 40(12), pages 191206, February.
 David K. Levine & William Zame, 1996.
"Debt Constraints and Equilibrium in Infinite Horizon Economies with Incomplete Markets,"
Levine's Working Paper Archive
1954, David K. Levine.
 Levine, David K. & Zame, William R., 1996. "Debt constraints and equilibrium in infinite horizon economies with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 26(1), pages 103131.
 David K. Levine & William R. Zame, 1992. "Debt Constraints and Equilibrium in Infinite Horizon Economies with Incomplete Markets," UCLA Economics Working Papers 666, UCLA Department of Economics.
 David K. Levine & William R. Zame, 1993. "Debt Constraints and Equilibrium in Infinite Horizon Economies with Incomplete Markets," UCLA Economics Working Papers 703, UCLA Department of Economics.
 Krebs, Tom, 2004.
"Nonexistence of recursive equilibria on compact state spaces when markets are incomplete,"
Journal of Economic Theory,
Elsevier, vol. 115(1), pages 134150, March.
 Tom Krebs, 2002. "NonExistence of Recursive Equilibria on Compact State Spaces When Markets are Incomplete," Working Papers 200217, Brown University, Department of Economics.
 Tarek Coury & Emanuela Sciubba, 2006.
"Belief Heterogeneity and Survival in Incomplete Markets,"
Birkbeck Working Papers in Economics and Finance
0613, Birkbeck, Department of Economics, Mathematics & Statistics.
 Tarek Coury & Emanuela Sciubba, 2012. "Belief heterogeneity and survival in incomplete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 49(1), pages 3758, January.
 Hernandez D., Alejandro & Santos, Manuel S., 1996. "Competitive Equilibria for InfiniteHorizon Economies with Incomplete Markets," Journal of Economic Theory, Elsevier, vol. 71(1), pages 102130, October.
 Blume, Lawrence & Easley, David, 1992. "Evolution and market behavior," Journal of Economic Theory, Elsevier, vol. 58(1), pages 940, October.
 Robert A. Becker, 1980. "On the LongRun Steady State in a Simple Dynamic Model of Equilibrium with Heterogeneous Households," The Quarterly Journal of Economics, Oxford University Press, vol. 95(2), pages 375382.
 Bewley, Truman, 1982. "An integration of equilibrium theory and turnpike theory," Journal of Mathematical Economics, Elsevier, vol. 10(23), pages 233267, September.
 repec:cup:macdyn:v:6:y:2002:i:2:p:284306 is not listed on IDEAS
 Woodford, Michael & Santos, Manuel S., 1995.
"Rational asset pricing bubbles,"
UC3M Working papers. Economics
3913, Universidad Carlos III de Madrid. Departamento de Economía.
 Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, vol. 65(1), pages 1958, January.
 Manuel S. Santos & Michael Woodford, 1993. "Rational Asset Pricing Bubbles," Working Papers 9304, Centro de Investigacion Economica, ITAM.
 Duffie, Darrell, et al, 1994. "Stationary Markov Equilibria," Econometrica, Econometric Society, vol. 62(4), pages 74581, July.
 Rader, Trout, 1981. "Utility over time: The homothetic case," Journal of Economic Theory, Elsevier, vol. 25(2), pages 219236, October.
 Kubler, Felix & Schmedders, Karl, 2002. "Recursive Equilibria In Economies With Incomplete Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 6(02), pages 284306, April.
 Constantinides, George M & Duffie, Darrell, 1996.
"Asset Pricing with Heterogeneous Consumers,"
Journal of Political Economy,
University of Chicago Press, vol. 104(2), pages 21940, April.
 Constantinides,George & Duffie,Darrel, 1992. "Asset pricing with heterogeneous consumers," Discussion Paper Serie A 381, University of Bonn, Germany.
This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.
When requesting a correction, please mention this item's handle: RePEc:cla:levarc:784828000000000422. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (David K. Levine)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.