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When sunspots don't matter (*)

Author

Listed:
  • Karl Shell

    (Department of Economics, Cornell University, Ithaca, NY 14853-7601, USA)

  • Aditya Goenka

    (Department of Economics, University of Essex, Colchester CO4 3SQ, UK)

Abstract

We show that a finite, competitive economy is immune to sunspots if (i) preferences are strictly convex, (ii) the set of feasible allocations is convex, and (iii) the contingent-claims market is perfect. The conditions (i)-(ii) cover some, but not all, economies with nonconvex technologies. Based on an indivisible-good example, we show that even economies with strictly convex preferences and full insurance are not in general immune from sunspots. We also show that (1) the sufficient conditions (i)-(iii) are not necessary for sunspot immunity and (2) ex-ante efficiency is not necessary for immunity from sunspots.

Suggested Citation

  • Karl Shell & Aditya Goenka, 1996. "When sunspots don't matter (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 9(1), pages 169-178.
    • Handle: RePEc:spr:joecth:v:9:y:1996:i:1:p:169-178
    Note: Received: July 17, 1995; revised version November 30, 1995
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    Citations

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    Cited by:

    1. Garratt, Rod & Keister, Todd & Qin, Cheng-Zhong & Shell, Karl, 2002. "Equilibrium Prices When the Sunspot Variable Is Continuous," Journal of Economic Theory, Elsevier, vol. 107(1), pages 11-38, November.
    2. Franklin Allen & Douglas Gale, 2003. "Financial Fragility, Liquidity and Asset Prices," Center for Financial Institutions Working Papers 01-37, Wharton School Center for Financial Institutions, University of Pennsylvania.
    3. Bhattacharya, Joydeep & Guzman, Mark G. & Shell, Karl, 1998. "Price Level Volatility: A Simple Model of Money Taxes and Sunspots," Journal of Economic Theory, Elsevier, vol. 81(2), pages 401-430, August.
    4. Aditya Goenka & Stefano Matta, 2008. "Manipulation of endowments and sunspot equilibria," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 36(2), pages 267-282, August.
    5. Christophe Prechac & Aditya Goenka, 2004. "Are Sunspots Inevitable?," Econometric Society 2004 Far Eastern Meetings 786, Econometric Society.

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