Extending the Cass Trick

Lionel de Boisdeffre ()
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Lionel de Boisdeffre: Université Paris1 Panthéon-Sorbonne - Centre d'Economie de la Sorbonne, https://centredeconomiesorbonne.univ-paris1.fr

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: In a celebrated 1984 paper, David Cass provided an existence theorem for financial equilibria in incomplete markets with exogenous yields. The theorem showed that, when agents had symmetric information and ordered preferences, equilibria existed on purely financial markets and could be supported by any collection of state prices. This theorem built on the so-called "Cass trick", along which one agent in the economy had an Arrow-Debreu budget set, with one single budget constraint, while all other agents were constrained à la Radner (1972), that is, in every state of nature, given the financial transfers that the asset market permitted. The current paper extends Cass' theorem and the Cass trick to asymmetric information and non-ordered preferences. It shows that any collection of individual state prices under asymmetric information supports an equilibrium, provided one agent had full information. If the latter condition fails, the Cass trick cannot apply. A weaker result holds, namely equilibrium exists under the no-arbitrage condition

Keywords: sequential equilibrium; perfect foresight; existence of equilibrium; rational expectations; incomplete markets; asymmetric information; arbitrage (search for similar items in EconPapers)
JEL-codes: D52 (search for similar items in EconPapers)
Pages: 15 pages
Date: 2018-09
New Economics Papers: this item is included in nep-gth
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:18025

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