Abstract
Market objectives can conflict with long-term goals. Behind the conflict is the impatience axiom introduced by T. Koopmans to describe choices over time. The conflict is resolved here by introducing a new concept, sustainable markets. These differ from Arrow-Debreu markets in that traders have sustainable preferences and no bounds on short sales. Sustainable preferences are sensitive to the basic needs of the present without sacrificing the needs of future generations and embody the essence of sustainable development (Chichilnisky in Soc Choice Welf 13(2):231–257, 1996a; Res Energy Econ 73(4):467–491, 1996b). Theorems 1 and 2 show that limited arbitrage is a necessary and sufficient condition describing diversity and ensuring the existence of a sustainable market equilibrium where the invisible hand delivers sustainable as well as efficient solutions (Chichilnisky in Econ Theory 95:79–108, 1995; Chichilnisky and Heal in Econ Theory 12:163–176, 1998). In sustainable markets prices have a new role: they reflect both the value of instantaneous consumption and the value of the long-run future. The latter are connected to the independence of the axiom of choice at the foundations of mathematics (Godel 1940).
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This research was conducted at the Columbia Consortium for Risk Management (CCRM) directed by the author at Columbia University in New York, and its Program on Information and Resources (PIR). We gratefully acknowledge support from Grant No 5222-72 of the US Air Force Office of Research (US AFOSR) and its officer Professor Jun Zheng, Arlington VA. The initial results on sustainable preferences were presented as an invited address at Stanford University’s 1993 Seminar on Reconsideration of Values, organized by Kenneth Arrow, and more recently in 2000 at the Fields Institute for Mathematical Sciences in Toronto Canada, at the NBER Conference Mathematical Economics: The Legacy of Gerard Debreu at UC Berkeley, October 21, 2005, the Department of Economics of the University of Kansas National Bureau of Economic Research General Equilibrium Conference, September 2006, the Department of Statistics of the University of Oslo, Norway, Fall 2007, the Department of Statistics of Columbia University, Fall 2007, the US AFOSR in Arlington VA, January 2010, and the Colloqium at the Mathematics Department and the Institute for Behavioral Sciences of the University of California at Irvine, May 18, 2010. We thank the above institutions and individuals for supporting the research as well as Eduardo Jose Chichilnisky, Salk Institute, La Jolla, California, Economic Theory editor Nicholas Yannelis and two anonymous reviewers, for valuable comments and suggestions.
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Chichilnisky, G. Sustainable markets with short sales. Econ Theory 49, 293–307 (2012). https://doi.org/10.1007/s00199-011-0626-6
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DOI: https://doi.org/10.1007/s00199-011-0626-6
Keywords
- Sustainability
- Impatience
- Axioms for sustainable preferences
- Arbitrage
- General equilibrium with infinite horizons