Constrained suboptimality in incomplete markets: A general approach and two applications

Alessandro Citanna, Atsushi Kajii, Antonio Villanacci

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Abstract

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.

Original languageEnglish (US)
Pages (from-to)495-521
Number of pages27
JournalEconomic Theory
Volume11
Issue number3
DOIs
StatePublished - May 1998

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ASJC Scopus subject areas

  • Economics and Econometrics

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