Market structure and competitive equilibrium in dynamic economic models (Q1821000)

This paper establishes the equivalence between two types of dynamic economic models which allow overlapping generations of both finitely- lived and infinitely-lived agents, i.e., ''complete-market'' and ''recursive-market'' models. The ''complete-market'' model, discussed mainly in theoretical literature, assumes the existence of Arrow-Debreu type markets in which an auctioneer intermediates all trades simultaneously, regardless of their dates, states and contingencies. The ''recursive- market'' model, which is used more often in applied literature, assumes that exchange takes place in spot markets plus one-step-ahead security markets at each date. These two formulations of markets entail different notions of equilibrium: the roles of time and generational overlap are emphasized in the recursive-market model but not in the complete-market model. The equivalence of the two markets is defined in the sense that an allocation is supported by the equilibrium in one market if and only if it is supported by an equilibrium in the other market. The equivalence theorem requires the imposition of side conditions such as to rule out portfolio sequences for which the value of debt exceeds the present value of future savings. In other words, agents cannot roll over their debt forever. The theorem is an extension of the Arrow equivalence theorem for static economies into a stochastic dynamic model.