Constrained Suboptimality in Incomplete Markets: A General Approach and Two Applications

In this paper we re-examine generic constrained suboptimality of equilibrium allocations with incomplete numeraire asset markets. We provide a general framework which is capable of resolving some issues left open by the previous literature, and encompasses many kinds of intervention in partially con...

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Bibliographic Details
Published in:Economic theory 1998-05, Vol.11 (3), p.495-521
Main Authors: Citanna, Alessandro, Kajii, Atsushi, Villanacci, Antonio
Format: Article
Language:English
Subjects:
Asset markets
Commodities
Constrained optimization
domain_shs.eco.eco
Economic theory
Economics and Finance
Endowments
Equilibrium
Household consumption
Humanities and Social Sciences
Incomplete markets
Market economies
Market economy
Market equilibrium
Stock exchange
Utility functions
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Summary:In this paper we re-examine generic constrained suboptimality of equilibrium allocations with incomplete numeraire asset markets. We provide a general framework which is capable of resolving some issues left open by the previous literature, and encompasses many kinds of intervention in partially controlled market economies. In particular, we establish generic constrained suboptimality, as studied by Geanakoplos and Polemarchakis, even without an upper bound on the number of households. Moreover, we consider the case where asset markets are left open, and the planner can make lump-sum transfers in a limited number of goods. We show that such a perfectly anticipated wealth redistribution policy, though consistent with the assumed incomplete financial structure, is typically effective.
ISSN:0938-2259
1432-0479
DOI:10.1007/s001990050199