THE PROBABILITY APPROACH TO GENERAL EQUILIBRIUM WITH PRODUCTION

Martine Quinzii and Michael Magill
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Michael Magill: Department of Economics, University of California Davis

No 80, Working Papers from University of California, Davis, Department of Economics

Abstract: We develop an alternative approach to the general equilibrium analysis of a stochastic production economy when firms? choices of investment influence the probability distributions of their output. Using a normative approach we derive the criterion that a firm should maximize to obtain a Pareto optimal equilibrium: the criterion expresses the firm?s contribution to the expected social utility of output, and is not the linear criterion of market value. If firms do not know agents utility functions, and are restricted to using the information conveyed by prices then they can construct an approximate criterion which leads to a second-best choice of investment which, in examples, is found to be close to the first best.

Keywords: equilibrium; production (search for similar items in EconPapers)
JEL-codes: A1 R3 (search for similar items in EconPapers)
Pages: 44
Date: 2007-11-30
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Related works:
Journal Article: The probability approach to general equilibrium with production (2009)
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