Coarse Competitive Equilibrium and Extreme Prices

Wolfgang Pesendorfer (), Tomasz Strzalecki and Faruk Gul
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Faruk Gul: Princeton University

No 1412, 2014 Meeting Papers from Society for Economic Dynamics

Abstract: (CCE), to study households' inability to tailor their consumption to the state of the economy. Our notion is motivated by limited cognitive ability (in particular attention, memory, and complexity) and it maintains the complete market structure of competitive equilibrium. Compared to standard competitive equilibrium, our concept yields riskier allocations and more extreme prices (both for consumption and for assets). Thus, limited cognitive ability can produce market data that are usually attributed to heightened degrees of risk aversion. We provide a tractable model that is suitable for general equilibrium analysis as well as asset pricing in dynamic environment.

Date: 2014
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Journal Article: Coarse Competitive Equilibrium and Extreme Prices (2017)
Working Paper: Coarse Competitive Equilibrium and Extreme Prices
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