Infinite horizon equilibrium with incomplete markets (Q582195)

This paper examines competitive equilibrium in an infinite-horizon model with incomplete markets and constant-returns-to-scale technology. Equilibria are characterized as limits of finite-horizon truncated equilibria. The key to this proof is the condition of ``extensibility'', which says that in incomplete markets, if short-sale constraints have been satisfied through a particular date, then they can be satisfied again through trading at the equilibrium prices in the next period. In this model, there are countably many markets. Each market meets at a specific time. Only finitely many markets meet at any particular date. The objects of trade are claims to current consumption and to receive other claims in subsequent markets. These claims are held and traded by agents, who may be either finitely- or infinitely-lived. An equilibrium in this economy is a vector of consumption plans, production plans and prices which satisfy the social feasibility condition (i.e., demand does not exceed supply) and the individual rationality conditions (i.e., utilities are maximized subject to budget constraints and profits are maximized in each market). An equilibrium is truncated at time t if none of the components of these vectors occurring after T is at all relevant to the equilibrium. The paper shows that under the extensibility condition, every infinite horizon equilibrium is a limit of finite-horizon truncated equilibria. A counter example is provided with which to show that without the extensibility condition, a sequence of truncated equilibria may converge to a nonequilibrium.