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The aggregate weak axiom in a financial economy through dominant substitution effects

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  • John Quah

    () (Economics Department, University of Oxford)

Abstract

Consider a two period financial economy with incomplete markets and with agents having von Neumann-Morgenstern utility functions. It is well known that when the economys endowments are collinear, the excess demand function will obey the weak axiom when certain mild restrictions are imposed on agents coefficient of relative risk aversion. This result is obtained through the application of a theorem on the law of demand (for individual demand) formulated independently by Milleron (1974) and Mitjuschin and Polterovich (1978). In this paper, we develop their arguments further and apply them to economies without collinear endowments. We identify conditions which guarantee that the economys excess demand function obeys the weak axiom near an equilibrium price.

Suggested Citation

  • John Quah, 2004. "The aggregate weak axiom in a financial economy through dominant substitution effects," Economics Papers 2004-W18, Economics Group, Nuffield College, University of Oxford.
  • Handle: RePEc:nuf:econwp:0418
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    References listed on IDEAS

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    1. Mas-Colell,Andreu, 1990. "The Theory of General Economic Equilibrium," Cambridge Books, Cambridge University Press, number 9780521388702.
    2. Jerison, Michael, 1999. "Dispersed excess demands, the weak axiom and uniqueness of equilibrium," Journal of Mathematical Economics, Elsevier, vol. 31(1), pages 15-48, February.
    3. John K.-H. Quah, 2000. "The Monotonicity of Individual and Market Demand," Econometrica, Econometric Society, vol. 68(4), pages 911-930, July.
    4. Magill, Michael & Shafer, Wayne, 1991. "Incomplete markets," Handbook of Mathematical Economics,in: W. Hildenbrand & H. Sonnenschein (ed.), Handbook of Mathematical Economics, edition 1, volume 4, chapter 30, pages 1523-1614 Elsevier.
    5. repec:rus:hseeco:94360 is not listed on IDEAS
    6. Bettzuge, Marc Oliver, 1998. "An extension of a theorem by Mitjushin and Polterovich to incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 30(3), pages 285-300, October.
    7. Hildenbrand, Werner, 1983. "On the "Law of Demand."," Econometrica, Econometric Society, vol. 51(4), pages 997-1019, July.
    8. John K.H. Quah, 2003. "The Law of Demand and Risk Aversion," Econometrica, Econometric Society, vol. 71(2), pages 713-721, March.
    9. Nachbar, John H., 2004. "General equilibrium comparative statics: discrete shocks in production economies," Journal of Mathematical Economics, Elsevier, vol. 40(1-2), pages 153-163, February.
    10. Hens, Thorsten & Loeffler, Andras, 1995. "Gross substitution in financial markets," Economics Letters, Elsevier, vol. 49(1), pages 39-43, July.
    11. Quah, John K. -H., 2003. "Market demand and comparative statics when goods are normal," Journal of Mathematical Economics, Elsevier, vol. 39(3-4), pages 317-333, June.
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