Non-existence of competitive equilibria with dynamically inconsistent preferences

Gabrieli, T. and Ghosal, S. (2013) Non-existence of competitive equilibria with dynamically inconsistent preferences. Economic Theory, 52(1), pp. 299-313. (doi:10.1007/s00199-011-0623-9)

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Abstract

This paper shows the robust non-existence of competitive equilibria even in a simple three period representative agent economy with dynamically inconsistent preferences. We distinguish between a sophisticated and naive representative agent. Even when underlying preferences are monotone and convex, at given prices, we show by example that the induced preference of the sophisticated representative agent over choices in first-period markets is both non-convex and satiated. Even allowing for negative prices, the market-clearing allocation is not contained in the convex hull of demand. Finally, with a naive representative agent, we show that perfect foresight is incompatible with market clearing and individual optimization at given prices.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Ghosal, Professor Sayantan
Authors: Gabrieli, T., and Ghosal, S.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Economic Theory
ISSN:0938-2259
ISSN (Online):1432-0479
Published Online:01 May 2011

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