On the Completeness of Complete Markets
We reconsider the allocational invariance of equilibria to different formulations of market completeness. We identify the so-far neglected assumption of sophisticated behavior as crucial to this result. The paper studies three market structures. First, the Arrow-Debreu setting is considered. Second, sequentially complete markets are analyzed, where goods on the spot markets and all contingent one-period ahead commodities can be traded in every state. Finally, complete markets are analyzed, where all possible contingent commodities can be traded at every state. Preferences may be time-consistent or time-inconsistent. A distinction is made between naïve and sophisticated behavior. For economies with time-inconsistent preferences, Arrow-Debreu equilibria are not related to either sequentially complete equilibria or complete equilibria. It does hold that every equilibrium consumption that can be attained in sequentially complete markets, can also be attained in complete markets. An example shows that the converse is not true for naïve economies. Finally, when preferences are restricted to be time-consistent and households are sophisticated, the three market structures yield the same equilibrium consumption. Surprisingly, for naïve households, this result is not true, even when preferences are time-consistent.
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