Rich by Accident: the Second Welfare Theorem with a Redundant Asset Under Imperfect Foresight

Shurojit Chatterji and Atsushi Kajii
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Shurojit Chatterji: Singapore Management University

No 48, Working Papers on Central Bank Communication from University of Tokyo, Graduate School of Economics

Abstract: We consider a multiperiod (T-period) model with no uncertainty where short term bonds co-exist with a long term bond. Markets are complete with just the short term bonds so that under the usual hypothesis of perfect foresight, the long term bond is redundant by no arbitrage in that it has no allocational implications. We dispense with perfect foresight, derive appropriate no arbitrage conditions and show that the presence of the long term bond has significant allocational implications. Specifically, in the model with just the short term bond, we show that a T dimensional subset of efficient allocations can arise as Walrasian equilibria whereas the dimension of efficient allocations is one less than the number of households (assumed to be much larger than T). In the model with the both types of bonds, essentially all efficient allocations might arise as Walrasian equilibria; minute errors in forecasting prices might generate all income transfers that are consistent with efficiency. We argue that the beneficiaries of such unanticipated income transfers are determined not by the superiority of forecasts but rather by accident.

Keywords: General equilibrium; Efficient temporary equilibrium; Endogenous price forecasts; Redundant Assets (search for similar items in EconPapers)
JEL-codes: D51 D53 D61 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2024-03
New Economics Papers: this item is included in nep-mic and nep-sea
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