Equilibrium Selections

Beth Allen, Jayasri Dutta () and Heracles Polemarchakis
Additional contact information
Beth Allen: Department of Economics, Universit.y of Minnesota and Federal Reserve Bank of Minneapolis
Heracles Polemarchakis: CORE, Université catholique de Louvain, B-1348 Louvain-la-Neuve, Belgium

No 1994071, LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: This paper analyses the impact of multiple competitive equilibria and complete markets in a simple general equilibrium model. A random selection from the equilibrium correspondence of a finite exchange economy defines probability distributions on equilibrium prices. Asset markets allow traders to insure against the resulting uncertainty. If asset markets are complete, equilibrium selections are necessarily degenerate. The selection cannot be non- trivially random, and must assign probability one to particular equilibrium price vectors. In this case, asset prices reveal the choice of equilibrium price vectors and achieve the coordination of traders' expectations. If the asset market is incomplete, equilibrium selections can be non-degenerate, so that price uncertainty is self-fulfilling. A fully insured random selection defines an iterative procedure of reallocations which is Pareto improving at each step. The process converges to a Pareto optimum in finitely many steps. The key requirement is that the random selection be continuous, which is a generic condition for smooth exchange economies with strictly concave utility functions.

Keywords: multiple equilibria; random selections; asset markets; rational expectations; convergence (search for similar items in EconPapers)
JEL-codes: D50 D60 D62 (search for similar items in EconPapers)
Date: 1994-12-01
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://sites.uclouvain.be/core/publications/coredp/coredp1994.html (text/html)

Related works:
Working Paper: Equilibrium selections (1994)
Working Paper: Equilibrium Selections (1994)
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:cor:louvco:1994071

Access Statistics for this paper

More papers in LIDAM Discussion Papers CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) Voie du Roman Pays 34, 1348 Louvain-la-Neuve (Belgium). Contact information at EDIRC.
Bibliographic data for series maintained by Alain GILLIS ().