Beker, Pablo and Chattopadhyay, Subir (2009) Consumption dynamics in general equilibrium : a characterisation when markets are incomplete. Working Paper. Department of Economics, University of Warwick: University of Warwick. The Warwick Economics Research Paper Series (TWERPS), Vol.2009 (No.921).

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Abstract

We introduce a methodology for analysing infinite horizon economies with two agents, one good, and incomplete markets. We provide an example in which an agent’s equilibrium consumption is zero eventually with probability one even if she has correct beliefs and is marginally more patient. We then prove the following general result: if markets are effectively incomplete forever then on any equilibrium path on which some agent’s consumption is bounded away from zero eventually, the other agent’s consumption is zero eventually–so either some agent vanishes, in that she consumes zero eventually, or the consumption of both agents is arbitrarily close to zero infinitely often. Later we show that (a) for most economies in which individual endowments are finite state time homogeneous Markov processes, the consumption of an agent who has a uniformly positive endowment cannot converge to zero and (b) the possibility that an agent vanishes is a robust outcome since for a wide class of economies with incomplete markets, there are equilibria in which an agent’s consumption is zero eventually with probability one even though she has correct beliefs as in the example. In sharp contrast to the results in the case studied by Sandroni (2000) and Blume and Easley (2006) where markets are complete, our results show that when markets are incomplete not only can the more patient agent (or the one with more accurate beliefs) be eliminated but there are situations in which neither agent is eliminated.

Item Type:	Working or Discussion Paper (Working Paper)
Subjects:	H Social Sciences > HB Economic Theory
Divisions:	Faculty of Social Sciences > Economics
Library of Congress Subject Headings (LCSH):	Consumption (Economics), Equilibrium (Economics)
Series Name:	The Warwick Economics Research Paper Series (TWERPS)
Publisher:	University of Warwick
Place of Publication:	Department of Economics, University of Warwick
Official Date:	2009
Dates:	Date Event 2009 Published
Volume:	Vol.2009
Number:	No.921
Institution:	University of Warwick
Status:	Not Peer Reviewed
Access rights to Published version:	Open Access
Funder:	Spain. Ministerio de Educación y Ciencia (MEC)
Grant number:	SEJ2004-02172 (MEC)
Version or Related Resource:	Published in: Beker, P. and Chattopadhyay, S. (2009). Consumption dynamics in general equilibrium: a characterisation when markets are incomplete. Journal of Economic Theory, 145(6), pp. 2133-2185. http://wrap.warwick.ac.uk/id/eprint/41578
Related URLs:	Related item in WRAP

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• Consumption dynamics in general equilibrium : a characterisation when markets are incomplete. (deposited 16 Nov 2010 14:49) [Currently Displayed]
  • Consumption dynamics in general equilibrium : a characterisation when markets are incomplete. (deposited 09 Feb 2012 09:42)

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