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Computing equilibria when asset markets are incomplete.

Existence of equilibrium with incomplete markets is problematic because demand functions are typically not continuous. Discontinuities occur at prices for which a marketed asset suddenly becomes redundant. We show that this discontinuity disappears if we allow an agent in the economy to introduce a...

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Published in:Econometrica Vol. 64; pp. 1 - 28
Main Authors: Brown, Donald J., DeMarzo, Peter M., Eaves, B. Curtis
Format: Article
Published: Wiley-Blackwell January 1996
Subjects:
Economic equilibrium
Assets (Accounting)
Pricing
Algorithms
Online Access:View this record in EBSCOhost
Summary:Existence of equilibrium with incomplete markets is problematic because demand functions are typically not continuous. Discontinuities occur at prices for which a marketed asset suddenly becomes redundant. We show that this discontinuity disappears if we allow an agent in the economy to introduce a new asset when such redundancies occur. This enables us to prove existence with incomplete markets using a standard path-following argument. Hence, available algorithms for path-following in |WbR[|WB]K can be applied to compute equilibria in the GEI case. We demonstrate this by computing equilibrium for a numerical example. Reprinted by permission of the Econometric Society.