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Coarse Competitive Equilibrium and Extreme Prices

Faruk Gul, Wolfgang Pesendorfer and Tomasz Strzalecki ()

American Economic Review, 2017, vol. 107, issue 1, 109-37

Abstract: We introduce a notion of coarse competitive equilibrium, to study agents' inability to tailor their consumption to prices. Our goal is to incorporate limited cognitive ability (in particular limited attention, memory, and complexity) into the analysis of competitive equilibrium. Compared to standard competitive equilibrium, our concept yields more extreme prices and, when all agents have the same endowment, riskier allocations. We provide a tractable model suitable for general equilibrium analysis as well as asset pricing.

JEL-codes: D11 D51 D91 G10 (search for similar items in EconPapers)
Date: 2017
Note: DOI: 10.1257/aer.20141287
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Working Paper: Coarse Competitive Equilibrium and Extreme Prices (2014)
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