When sunspots don't matter (*)
Karl Shell () and
Aditya Goenka ()
Economic Theory, 1996, vol. 9, issue 1, 169-178
We show that a finite, competitive economy is immune to sunspots if (i) preferences are strictly convex, (ii) the set of feasible allocations is convex, and (iii) the contingent-claims market is perfect. The conditions (i)-(ii) cover some, but not all, economies with nonconvex technologies. Based on an indivisible-good example, we show that even economies with strictly convex preferences and full insurance are not in general immune from sunspots. We also show that (1) the sufficient conditions (i)-(iii) are not necessary for sunspot immunity and (2) ex-ante efficiency is not necessary for immunity from sunspots.
Note: Received: July 17, 1995; revised version November 30, 1995
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