RECURSIVE EQUILIBRIA IN ECONOMIES WITH INCOMPLETE MARKETS

Felix Kubler and Karl Schmedders

Macroeconomic Dynamics, 2002, vol. 6, issue 2, 284-306

Abstract: We examine minimal sufficient state spaces for equilibria in a Lucas asset pricing model with heterogeneous agents and incomplete markets. It is clear that even if all fundamentals of the economy follow a first-order Markov process, equilibrium prices and allocations generally will depend not only on the current exogenous shock but also on the distribution of wealth among the heterogeneous agents. The main contribution of this paper is to give an example of an infinite-horizon economy with Markovian fundamentals, where the joint process of equilibrium asset holdings and exogenous shocks does not constitute a sufficient state space either.

Date: 2002
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