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Core and equilibrium in incomplete markets

Conclusions

The classical foundation of general equilibrium analysis by the cooperative concept of the core has been extended to an economy with incomplete trading possibilities. This has been accomplished by restricting the exchange possibilities of coalitions of traders in accordance with the available market structure. However, compared with the classical result, the present foundation of rational expectations equilibria may appear much weaker. The reason is that in reality consumers may sign contracts which are more complex than the existing market structure. Therefore, it may happen that prices cannot decentralize all cooperative transactions by markets, in spite of perfect competition. With an incomplete set of markets, therefore, a cooperative exchange of commodities by individual contracts may coexist with trading in non-cooperative, competitive markets.

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I wish to thank Martin Hellwig for helpful comments and suggestions. Of course, I remain responsible for all shortcomings of the paper.

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Bester, H. Core and equilibrium in incomplete markets. Zeitschr. f. Nationalökonomie 44, 255–266 (1984). https://doi.org/10.1007/BF01289662

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Keywords

  • General Equilibrium
  • Market Structure
  • Competitive Market
  • Rational Expectation
  • Equilibrium Analysis