Creator: Prescott, Edward C. and Townsend, Robert M., 1948- Series: Working paper (Federal Reserve Bank of Minneapolis. Research Department) Number: 203 Abstract:
General competitive analysis is extended to cover a dynamic, pure-exchange economy with privately observed shocks to preferences. In the linear, infinite-dimensional space containing lotteries we establish the existence of optima, the existence of competitive equilibria, and that every competitive equilibrium is an optimum. An example illustrates that rationing and securities with contrived risk have an equilibrium interpretation.
Keyword: Lotteries, Competitive equilibria, and Pure exchange Subject (JEL): D82 - Asymmetric and Private Information; Mechanism Design and D51 - Exchange and Production Economies
Creator: Prescott, Edward C. and Ríos-Rull, José-Víctor Series: Advances in dynamic economics Abstract:
A necessary feature for equilibrium is that beliefs about the behavior of other agents are rational. We argue that in stationary OLG environments this implies that any future generation in the same situation as the initial generation must do as well as the initial generation did in that situation. We conclude that the existing equilibrium concepts in the literature do not satisfy this condition. We then propose an alternative equilibrium concept, organizational equilibrium, that satisfies this condition. We show that equilibrium exists, it is unique, and it improves over autarky without achieving optimality. Moreover, the equilibrium can be readily found by solving a maximization program.
Keyword: Rational behavior, Equilibrium, and Overlapping generations Subject (JEL): D51 - Exchange and Production Economies and E13 - General Aggregative Models: Neoclassical