Existence and structure of stochastic equilibria with intertemporal substitution (Q5957682): Difference between revisions

The most popular utility functional used in the economics under uncertainty is the time-additive utility functional. This functional extensively exploited in Merton's theory of optimal portfolio choice [\textit{R. C. Merton}, J. Econ. Theory 3, 373-413 (1971)] and Breeden's consumption based CAPM [\textit{D. T. Breeden}, J. Financial Econ. 7, 265-296 (1979)]. The time-additive utility functional approach has been criticized and extended in several directions. The most fundamental critic was made by \textit{A. Hindy, C.-F. Huang} and \textit{D. Kreps} [J. Math. Econ. 21, No. 5, 401-440 (1992; Zbl 0765.90023)] who in the same time proposed a new approach to the intertemporal decision theory. They presented several topologies which formalize the idea of intertemporal substitution and computed the corresponding topological duals from which price functionals should come. At the same time they showed that the time-additive expected utility functional is not continuous with respect to these topologies and presented alternative utility functionals which are indeed continuous with respect to the proposed topologies. \textit{A. Hindy} and \textit{C.-F. Huang} [Econometrica 60, No. 4, 781-801 (1992; Zbl 0764.90010)] extended this approach to the stochastic framework. They did not give, however, the existence criteria of an equilibrium. In the case of certainty the problem of existence is solved by \textit{A. Mas-Colell} and \textit{S. Richard} [J. Econ. Theory 53, No. 1, 1-11 (1991; Zbl 0723.90008)]. In the general case with uncertainty the Mas-Colell-Richard theorem does not apply. The present paper fills this gap. Existence of an Arrow-Debreu equilibrium is proved for economies which include the previous mentioned economies as a special case. Efficient allocations and supporting price functionals are identified and characterized.