Core Concepts for Incomplete Market Economies

Helga Habis and P. Jean-Jacques Herings

No 1119, CERS-IE WORKING PAPERS from Institute of Economics, Centre for Economic and Regional Studies

Abstract: We examine the notion of the core when cooperation takes place in a setting with time and uncertainty. We do so in a two-period general equilibrium setting with incomplete markets. Market incompleteness implies that players cannot make all possible binding commitments regarding their actions at different date-events. We unify various treatments of dynamic core concepts existing in the literature. This results in definitions of the Classical Core, the Segregated Core, the Two-stage Core, the Strong Sequential Core, and the Weak Sequential Core. Except for the Classical Core, all these concepts can be defined by requiring absence of blocking in period 0 and at any date-event in period 1. The concepts only differ with respect to the notion of blocking in period 0. To evaluate these concepts, we study three market structures in detail: strongly complete markets, incomplete markets in finance economies, and incomplete markets in settings with multiple commodities. Even when markets are strongly complete, the Classical Core is argued not to be an appropriate concept. For the general case of incomplete markets, the Weak Sequential Core is the only concept that does not suffer from major defects.

Keywords: Incomplete Markets; Dynamic Core Concepts; Time and uncertainty (search for similar items in EconPapers)
JEL-codes: C71 C73 D52 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2011-05
New Economics Papers: this item is included in nep-dge and nep-gth
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Citations: View citations in EconPapers (4)

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Journal Article: Core concepts for incomplete market economies (2011)
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