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

John Quah

No 2004-W18, Economics Papers from Economics Group, Nuffield College, 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.

Pages: 37 pages
Date: 2004-08-01
New Economics Papers: this item is included in nep-fin
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