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Financial Equilibrium in a Production Economy without Rational Expectations of Prices: a basic Model of full Existence

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  • Lionel De Boisdeffre

    (CES - Centre d'économie de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne - CNRS - Centre National de la Recherche Scientifique, CATT - Centre d'Analyse Théorique et de Traitement des données économiques - UPPA - Université de Pau et des Pays de l'Adour)

Abstract

We extend our pure-exchange existence of equilibrium theorem, with differential information, private anticipations and no model to forecast prices, to a production economy of all ownership types: sole proprietorship, partnership and corporations. We show that, due to bounded rationality, all agents face a "minimum uncertainty", which typically adds to the 'exogenous uncertainty', on tomorrow's state of nature, an 'endogenous uncertainty' on future spot prices, depending on all agents' private beliefs today. At a sequential equilibrium, any achievable spot price is anticipated as possible by all agents, whose strategies are optimal, ex ante, and market clearing, ex post. We show this equilibrium exists, whenever their anticipations embed the minimum uncertainty set. This result, is stronger than classical ones of generic existence, along Radner (1979) and Hart (1975), and a step towards proving existence in a stochastic production economy without rational expectations of prices.

Suggested Citation

  • Lionel De Boisdeffre, 2017. "Financial Equilibrium in a Production Economy without Rational Expectations of Prices: a basic Model of full Existence," Working papers of CATT hal-02141062, HAL.
    • Handle: RePEc:hal:wpcatt:hal-02141062
    Note: View the original document on HAL open archive server: https://hal-univ-pau.archives-ouvertes.fr/hal-02141062
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    References listed on IDEAS

    as
    1. Radner, Roy, 1979. "Rational Expectations Equilibrium: Generic Existence and the Information Revealed by Prices," Econometrica, Econometric Society, vol. 47(3), pages 655-678, May.
    2. Radner, Roy, 1972. "Existence of Equilibrium of Plans, Prices, and Price Expectations in a Sequence of Markets," Econometrica, Econometric Society, vol. 40(2), pages 289-303, March.
    3. Hart, Oliver D., 1975. "On the optimality of equilibrium when the market structure is incomplete," Journal of Economic Theory, Elsevier, vol. 11(3), pages 418-443, December.
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