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 language | English |
|---|---|
| Pages (from-to) | 887-897 |
| Number of pages | 11 |
| Journal | Journal of Mathematical Economics |
| Volume | 41 |
| Issue number | 7 |
| DOIs | |
| Publication status | Published - 2005 Nov |
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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 journal › Article
}
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 -