Equilibrium in incomplete markets with differential information: A basic model of generic existence

Lionel de Boisdeffre

Mathematical Social Sciences, 2021, vol. 110, issue C, 53-62

Abstract: The paper demonstrates the generic existence of general equilibria in incomplete financial markets with asymmetric information. The economy has two periods and an ex ante uncertainty over the state of nature to be revealed at the second period. Securities pay off in cash or commodities at the second period, conditionally on the state of nature to be revealed. They permit transfers across periods and states, which are typically insufficient to span all state contingent claims to value, whatever the spot price to prevail. Under the standard smooth preference and perfect foresight assumptions, the paper shows that equilibria exist, except for a closed set of measure zero of securities and endowments. This theorem generalizes Duffie and Shafer’s (1985) to arbitrary financial and information structures. The equilibrium prices are consistent with any collection of state prices and norm values on spot markets. This refinement permits to extend to asymmetric information Cass’ (1984) theorem that any collection of state prices supports an equilibrium on purely financial markets.

Keywords: Sequential equilibrium; Perfect foresight; Existence of equilibrium; Rational expectations; Asymmetric information; Arbitrage (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0165489621000111
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:matsoc:v:110:y:2021:i:c:p:53-62

DOI: 10.1016/j.mathsocsci.2021.01.005

Access Statistics for this article

Mathematical Social Sciences is currently edited by J.-F. Laslier

More articles in Mathematical Social Sciences from Elsevier
Bibliographic data for series maintained by Catherine Liu ().