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Small Income Effects Destroy the Constrained Efficiency of All Equilibria in Finance Economies with Production

Author

Listed:
  • Egbert Dierker

    (Universität Wien)

  • Hildegard Dierker

    (Universität Wien)

  • Birgit Grodal

    (University of Copenhagen, Institute of Economics)

Abstract

We consider economies with incomplete markets, one good per state, private ownership of initial endowments, a single firm, and no assets other than shares in this firm. In this simple framework, arbitrarily small income effects can render every market equilibrium resulting from some production decision constrained inefficient. Thus, even if all utility functions are approximately quasilinear, the stock market can be unable to achieve a constrained efficient allocation given the agents' characteristics. Moreover, the phenomenon persists when the efficiency requirements are substantially weakened.

Suggested Citation

  • Egbert Dierker & Hildegard Dierker & Birgit Grodal, 2001. "Small Income Effects Destroy the Constrained Efficiency of All Equilibria in Finance Economies with Production," Discussion Papers 01-11, University of Copenhagen. Department of Economics.
    • Handle: RePEc:kud:kuiedp:0111
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    More about this item

    Keywords

    Incomplete markets with production; constrained efficiency; Drèze equilibria;
    All these keywords.

    JEL classification:

    • D2 - Microeconomics - - Production and Organizations
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • G1 - Financial Economics - - General Financial Markets

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