Inefficiency of equilibria with incomplete markets

    Research output: Contribution to journalArticle

    1 Citation (Scopus)

    Abstract

    As is well known, equilibria with incomplete markets are generically Pareto inefficient. In this paper, we demonstrate the leading role of a budget constraint in the occurrence of Pareto inefficiency of equilibria with incomplete markets. Specifically, on the basis of the classical two-period one-good pure exchange model we prove that so long as a budget constraint is met for all agents, equilibria with incomplete markets are generically Pareto inefficient in initial endowments and utility functions regardless of the optimization behavior of each agent. All we require of utility functions is a very weak hypothesis called current monotonicity. A simple unified method applicable to both a real asset case and a nominal asset case is presented, so that our claim is proved in both cases.

    Original languageEnglish
    Pages (from-to)887-897
    Number of pages11
    JournalJournal of Mathematical Economics
    Volume41
    Issue number7
    DOIs
    Publication statusPublished - 2005 Nov

    Fingerprint

    Incomplete Markets
    Pareto
    Budget Constraint
    Utility Function
    Categorical or nominal
    Monotonicity
    Optimization
    Demonstrate
    Incomplete markets
    Inefficiency
    Assets
    Utility function
    Budget constraint
    Model

    Keywords

    • Budget optimum
    • Current monotonicity
    • Incomplete market

    ASJC Scopus subject areas

    • Economics and Econometrics
    • Applied Mathematics

    Cite this

    Inefficiency of equilibria with incomplete markets. / Nagata, Ryo.

    In: Journal of Mathematical Economics, Vol. 41, No. 7, 11.2005, p. 887-897.

    Research output: Contribution to journalArticle

    @article{96730810b0ee4709b55b746a3d8d9766,
    title = "Inefficiency of equilibria with incomplete markets",
    abstract = "As is well known, equilibria with incomplete markets are generically Pareto inefficient. In this paper, we demonstrate the leading role of a budget constraint in the occurrence of Pareto inefficiency of equilibria with incomplete markets. Specifically, on the basis of the classical two-period one-good pure exchange model we prove that so long as a budget constraint is met for all agents, equilibria with incomplete markets are generically Pareto inefficient in initial endowments and utility functions regardless of the optimization behavior of each agent. All we require of utility functions is a very weak hypothesis called current monotonicity. A simple unified method applicable to both a real asset case and a nominal asset case is presented, so that our claim is proved in both cases.",
    keywords = "Budget optimum, Current monotonicity, Incomplete market",
    author = "Ryo Nagata",
    year = "2005",
    month = "11",
    doi = "10.1016/j.jmateco.2004.05.002",
    language = "English",
    volume = "41",
    pages = "887--897",
    journal = "Journal of Mathematical Economics",
    issn = "0304-4068",
    publisher = "Elsevier",
    number = "7",

    }

    TY - JOUR

    T1 - Inefficiency of equilibria with incomplete markets

    AU - Nagata, Ryo

    PY - 2005/11

    Y1 - 2005/11

    N2 - As is well known, equilibria with incomplete markets are generically Pareto inefficient. In this paper, we demonstrate the leading role of a budget constraint in the occurrence of Pareto inefficiency of equilibria with incomplete markets. Specifically, on the basis of the classical two-period one-good pure exchange model we prove that so long as a budget constraint is met for all agents, equilibria with incomplete markets are generically Pareto inefficient in initial endowments and utility functions regardless of the optimization behavior of each agent. All we require of utility functions is a very weak hypothesis called current monotonicity. A simple unified method applicable to both a real asset case and a nominal asset case is presented, so that our claim is proved in both cases.

    AB - As is well known, equilibria with incomplete markets are generically Pareto inefficient. In this paper, we demonstrate the leading role of a budget constraint in the occurrence of Pareto inefficiency of equilibria with incomplete markets. Specifically, on the basis of the classical two-period one-good pure exchange model we prove that so long as a budget constraint is met for all agents, equilibria with incomplete markets are generically Pareto inefficient in initial endowments and utility functions regardless of the optimization behavior of each agent. All we require of utility functions is a very weak hypothesis called current monotonicity. A simple unified method applicable to both a real asset case and a nominal asset case is presented, so that our claim is proved in both cases.

    KW - Budget optimum

    KW - Current monotonicity

    KW - Incomplete market

    UR - http://www.scopus.com/inward/record.url?scp=26844486255&partnerID=8YFLogxK

    UR - http://www.scopus.com/inward/citedby.url?scp=26844486255&partnerID=8YFLogxK

    U2 - 10.1016/j.jmateco.2004.05.002

    DO - 10.1016/j.jmateco.2004.05.002

    M3 - Article

    AN - SCOPUS:26844486255

    VL - 41

    SP - 887

    EP - 897

    JO - Journal of Mathematical Economics

    JF - Journal of Mathematical Economics

    SN - 0304-4068

    IS - 7

    ER -