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Equilibrium Selections

Author

Listed:
  • ALLEN, Beth

    (Department of Economics, Universit.y of Minnesota and Federal Reserve Bank of Minneapolis)

  • DUTTA , Jayasri

    (Faculty of Economics and Politics, University of Cambridge)

  • POLEMARCHAKIS , Heracles

    (CORE, Université catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium)

Abstract

This paper analyses the impact of multiple competitive equilibria and complete markets in a simple general equilibrium model. A random selection from the equilibrium correspondence of a finite exchange economy defines probability distributions on equilibrium prices. Asset markets allow traders to insure against the resulting uncertainty. If asset markets are complete, equilibrium selections are necessarily degenerate. The selection cannot be non- trivially random, and must assign probability one to particular equilibrium price vectors. In this case, asset prices reveal the choice of equilibrium price vectors and achieve the coordination of traders' expectations. If the asset market is incomplete, equilibrium selections can be non-degenerate, so that price uncertainty is self-fulfilling. A fully insured random selection defines an iterative procedure of reallocations which is Pareto improving at each step. The process converges to a Pareto optimum in finitely many steps. The key requirement is that the random selection be continuous, which is a generic condition for smooth exchange economies with strictly concave utility functions.

Suggested Citation

  • ALLEN, Beth & DUTTA , Jayasri & POLEMARCHAKIS , Heracles, 1994. "Equilibrium Selections," LIDAM Discussion Papers CORE 1994071, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvco:1994071
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    File URL: https://sites.uclouvain.be/core/publications/coredp/coredp1994.html
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    References listed on IDEAS

    as
    1. E. Malinvaud, 1972. "Prices for Individual Consumption, Quantity Indicators for Collective Consumption," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 39(4), pages 385-405.
    2. Balasko, Yves, 1983. "Extrinsic uncertainty revisited," Journal of Economic Theory, Elsevier, vol. 31(2), pages 203-210, December.
    3. Edmond Malinvaud, 1974. "The Allocation of Individual Risks in Large Markets," International Economic Association Series, in: Jacques H. Drèze (ed.), Allocation under Uncertainty: Equilibrium and Optimality, chapter 8, pages 110-125, Palgrave Macmillan.
    4. Mas-Colell, Andreu & Nachbar, John H., 1991. "On the finiteness of the number of critical equilibria, with an application to random selections," Journal of Mathematical Economics, Elsevier, vol. 20(4), pages 397-409.
    5. Chichilnisky, G. & Dutta, J. & Heal, G.M., 1992. "Price Uncertainty and Derivative Securities in a General Equilibrium Model," Papers 178, Cambridge - Risk, Information & Quantity Signals.
    6. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
    7. Azariadis, Costas, 1981. "Self-fulfilling prophecies," Journal of Economic Theory, Elsevier, vol. 25(3), pages 380-396, December.
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    Cited by:

    1. Hector Calvo-Pardo, 2009. "Are the antiglobalists right? Gains-from-trade without a Walrasian auctioneer," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 38(3), pages 561-592, March.
    2. Dutta, Jayasri & Morris, Stephen, 1997. "The Revelation of Information and Self-Fulfilling Beliefs," Journal of Economic Theory, Elsevier, vol. 73(1), pages 231-244, March.
    3. Ghosal, Sayantan & Morelli, Massimo, 2004. "Retrading in market games," Journal of Economic Theory, Elsevier, vol. 115(1), pages 151-181, March.

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    More about this item

    Keywords

    multiple equilibria; random selections; asset markets; rational expectations; convergence;
    All these keywords.

    JEL classification:

    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D60 - Microeconomics - - Welfare Economics - - - General
    • D62 - Microeconomics - - Welfare Economics - - - Externalities

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