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Aggregation in Incomplete Market with General Utility Functions

Author

Listed:
  • Chenghu Ma
  • Jiankang Zhang

Abstract

This paper tackles the "aggregation problem" for stochastic economies with possibly incomplete market. An "aggregation theorem" is proved towards an analytic construction of the representative agent’s utility function. This is done within a general time-state setup with general utility functions and without restrictions on the initial resource allocations. Welfare implications, concerning the social welfare loss resulting from market incompleteness, are readily reflected from the constructed representative agent’s utility function

Suggested Citation

  • Chenghu Ma & Jiankang Zhang, 2013. "Aggregation in Incomplete Market with General Utility Functions," Working Papers 2013-10-14, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    • Handle: RePEc:wyi:wpaper:002004
    as

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    File URL: http://research.soe.xmu.edu.cn/repec/upload/20093301440327055475115776.pdf
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    References listed on IDEAS

    as
    1. Grossman, Sanford J., 1977. "A characterization of the optimality of equilibrium in incomplete markets," Journal of Economic Theory, Elsevier, vol. 15(1), pages 1-15, June.
    2. Frank Milne, 1979. "Consumer Preferences, Linear Demand Functions and Aggregation in Competitive Asset Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 46(3), pages 407-417.
    3. Larry G. Epstein & Stanley E. Zin, 2013. "Substitution, risk aversion and the temporal behavior of consumption and asset returns: A theoretical framework," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part I, chapter 12, pages 207-239, World Scientific Publishing Co. Pte. Ltd..
    4. Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December.
    5. Hara, Chiaki & 原, 千秋 & ハラ, チアキ, 2008. "Heterogeneous Impatience in a Continuous-Time Model," PIE/CIS Discussion Paper 396, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.
    6. Breeden, Douglas T., 1979. "An intertemporal asset pricing model with stochastic consumption and investment opportunities," Journal of Financial Economics, Elsevier, vol. 7(3), pages 265-296, September.
    7. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
    8. Rubinstein, Mark, 1974. "An aggregation theorem for securities markets," Journal of Financial Economics, Elsevier, vol. 1(3), pages 225-244, September.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Aggregation; constrained Pareto optimal; incomplete market;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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