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Implementing Arrow-Debreu Equilibria by Trading Infinitely-Lived Securities

  • Kevin X. D. Huang

    (University of Utah)

  • Jan Werner

    (University of Minnesota)

We study the question of implementing Arrow-Debreu equilibrium allocations in infinite-time economy under uncertainty by sequential trading of infinitely-lived securities. The crucial aspect of implementation is the choice of feasibility constraints on agents' portfolio strategies. The main difficulty lies in the possibility of price bubbles in security markets. We derive an exact relation between Arrow-Debreu equilibrium allocations and sequential equilibrium allocations in security markets under two portfolio feasibility constraints: the wealth constraint, and the bounded borrowing constraint. We show that sequential equilibria with price bubbles correspond to Arrow-Debreu equilibria with income transfers.

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Paper provided by Econometric Society in its series Econometric Society World Congress 2000 Contributed Papers with number 1708.

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Date of creation: 01 Aug 2000
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Handle: RePEc:ecm:wc2000:1708
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  1. 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.
  2. Magill,Michael & Quinzii,Martine, 1992. "Infinite horizon,Incomplete markets," Discussion Paper Serie A 384, University of Bonn, Germany.
  3. Florenzano, Monique & Gourdel, Pascal, 1993. "Incomplete markets in infinite horizon : debt constraints versus node prices," CEPREMAP Working Papers (Couverture Orange) 9329, CEPREMAP.
  4. Manuel S. Santos & Michael Woodford, 1997. "Rational Asset Pricing Bubbles," Econometrica, Econometric Society, vol. 65(1), pages 19-58, January.
  5. L. Wade, 1988. "Review," Public Choice, Springer, vol. 58(1), pages 99-100, July.
  6. Kocherlakota, N.R., 1990. "Bubbles and Constraints on Debt Accumulation," Working Papers 90-29, University of Iowa, Department of Economics.
  7. Magill, M. & Quinzii, M., 1993. "Icomplete Markets Over an Infinite Horizon: Long-Lived Securities and Speculative Bubbles," Papers 9321, Southern California - Department of Economics.
  8. Tirole, Jean, 1982. "On the Possibility of Speculation under Rational Expectations," Econometrica, Econometric Society, vol. 50(5), pages 1163-81, September.
  9. Kandori, Michihiro, 1988. "Equivalent Equilibria," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 29(3), pages 401-17, August.
  10. Luigi Montrucchio & Fabio Privileggi, 2001. "On Fragility of Bubbles in Equilibrium Asset Pricing Models of Lucas-Type," ICER Working Papers - Applied Mathematics Series 05-2001, ICER - International Centre for Economic Research.
  11. Donald J. Brown & Charalambos Aliprantis & Owen Burkinshaw, 1985. "Edgeworth Equilibria," Cowles Foundation Discussion Papers 756R, Cowles Foundation for Research in Economics, Yale University.
    • Aliprantis, Charalambos D & Brown, Donald J & Burkinshaw, Owen, 1987. "Edgeworth Equilibria," Econometrica, Econometric Society, vol. 55(5), pages 1109-37, September.
  12. Kevin X.D. Huang & Jan Werner, 2000. "Asset price bubbles in Arrow-Debreu and sequential equilibrium," Economic Theory, Springer, vol. 15(2), pages 253-278.
  13. Peleg, Bezalel & Yaari, Menahem E, 1970. "Markets with Countably Many Commodities," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 11(3), pages 369-77, October.
  14. Duffie, J Darrell & Huang, Chi-fu, 1985. "Implementing Arrow-Debreu Equilibria by Continuous Trading of Few Long-lived Securities," Econometrica, Econometric Society, vol. 53(6), pages 1337-56, November.
  15. Bewley, Truman F., 1972. "Existence of equilibria in economies with infinitely many commodities," Journal of Economic Theory, Elsevier, vol. 4(3), pages 514-540, June.
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