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Nonexistence of constrained efficient production plans

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  • Zierhut, Michael

Abstract

Any normative theory is based on a standard of social welfare. When markets are incomplete, the usual standard is constrained efficiency: A planner who may only use traded assets for transfers of future income cannot achieve a Pareto improvement. This paper points out that constrained efficiency is a weak basis for the normative theory of the firm. Unless short sales are restricted, a constrained Pareto optimum need not exist. This nonexistence problem is robust to perturbations of endowments and leads to surprising economic outcomes: Even though Drèze equilibria are the only candidates for constrained efficient plans, all of them can be Pareto dominated by equilibria with alternative objectives of the firm.

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  • Zierhut, Michael, 2019. "Nonexistence of constrained efficient production plans," Journal of Mathematical Economics, Elsevier, vol. 83(C), pages 127-136.
    • Handle: RePEc:eee:mateco:v:83:y:2019:i:c:p:127-136
    DOI: 10.1016/j.jmateco.2019.04.011
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    References listed on IDEAS

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    Cited by:

    1. Marc Oliver Bettzüge & Thorsten Hens & Michael Zierhut, 2022. "Financial intermediation and the welfare theorems in incomplete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 73(2), pages 457-486, April.
    2. Michael Zierhut, 2021. "Indeterminacy of Cournot–Walras equilibrium with incomplete markets," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 71(1), pages 81-114, February.

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