Large economies with differential information but without free disposal

V. Filipe Martins-da-Rocha and Laura Angeloni

No 671, FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) from EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil)

Abstract: We consider exchange economies with a continuum of agents and differential information about finitely many states of nature. It was proved in Einy, Moreno and Shitovitz (2001) that if we allow for free disposal in the market clearing (feasibility) constraints then an irreducible economy has a competitive (or Walrasian expectations) equilibrium, and moreover, the set of competitive equilibrium allocations coincides with the private core. However when feasibility is defined with free disposal, competitive equilibrium allocations may not be incentive compatible and contracts may not be enforceable (see e.g. Glycopantis, Muir and Yannelis (2002)). This is the main motivation for considering equilibrium solutions with exact feasibility. We first prove that the results in Einy et al. (2001) are still valid without freedisposal. Then we define an incentive compatibility property motivated by the issue of contracts’ execution and we prove that every Pareto optimal exact feasible allocation is incentive compatible, implying that contracts of competitive or core allocations are enforceable.

Date: 2008-02-28
New Economics Papers: this item is included in nep-cba
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