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Implementing Arrow-Debreu Equilibria by Trading Infinitely-Lived Securities

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Listed:
  • Kevin X. D. Huang

    (University of Utah)

  • Jan Werner

    (University of Minnesota)

Abstract

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.

Suggested Citation

  • Kevin X. D. Huang & Jan Werner, 2000. "Implementing Arrow-Debreu Equilibria by Trading Infinitely-Lived Securities," Econometric Society World Congress 2000 Contributed Papers 1708, Econometric Society.
  • Handle: RePEc:ecm:wc2000:1708
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    Cited by:

    1. Patrick Leoni, 2008. "Market power, survival and accuracy of predictions in financial markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 34(1), pages 189-206, January.
    2. Aloisio Araujo, 2015. "General equilibrium, preferences and financial institutions after the crisis," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 58(2), pages 217-254, February.
    3. Marco Bassetto, 2006. "Politics and Efficiency of Separating Capital and Ordinary Government Budgets," The Quarterly Journal of Economics, Oxford University Press, vol. 121(4), pages 1167-1210.
    4. BLOISE, Gaetano & DRÈZE, Jacques & POLEMARCHAKIS, Heracles, 2002. "Money and indeterminacy over an infinite horizon," CORE Discussion Papers 2002021, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    5. Lise Clain-Chamosset-Yvrard, 2018. "Expectation-driven asset price fluctuations under the spirit of capitalism hypothesis: The role of heterogeneity," Working Papers halshs-01719844, HAL.
    6. Werner, Jan, 2014. "Rational asset pricing bubbles and debt constraints," Journal of Mathematical Economics, Elsevier, vol. 53(C), pages 145-152.

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