Walras' Law, Pareto Efficiency, and Intermediation in Overlapping Generations Economies

Mark Pingle and Leigh Tesfatsion ()

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: Aiyagari (1992) demonstrates a connection between the failure of Walras' Law and nonoptimal equilibria for a version of the pure-exchange overlapping generations (OG) econ omy first studied by Samuelson (1958). The significant implication ofWalras' Law in finite economies, given all prices are positive and all consumers are locally nonsatiated, is that an excess supply (in value terms) cannot exist for some subset of goods without an excess demand (in value terms) existing forsome othersubset ofgoods. Aiyagari defines the failure of Walras' Law as a situation in which this implication of Walras' Law does not hold. His basic and interesting result is to show that "a competitive equilibrium is nonoptimal if and only if the above impHcation of Walras' Law fails in its neighborhood."

Date: 1994-03-01
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