Consumption dynamics in general equilibrium: a characterisation when markets are incomplete
The paper's goal is to study the asymptotic behavior of consumption in a dynamic general equilibrium incomplete market model, and in particular to resolve the problem of agents survival in long term in models of that kind. The model consists of two infinitely lived agents, who maximize discounted expected utilities of perishable consumption good over an implicit debt constraint budget set. The budget sets depend on realizations of aggregate endowment, prices and net return on the only security asset available in the market. At each period there is a finite number of possible states of nature (fixed for all periods), and each agent is endowed with a subjective probability measure (belief). The first important result is Theorem 1 according to which if both agents are equally impatient and the consumption of some agent is eventually strongly positive then the consumption of the other agent is zero almost surely over some reasonable chosen subset of all possible consumption processes, no matter whether beliefs are correct or not -- this result is opposite to the case of complete markets. Under somewhat changed assumptions (among them that the endowment and asset payoff processes are finite state time homogeneous Markov processes) Theorem 2 states that for most economies no agent eventually vanishes -- this contrasts the complete market case again, where if one agent is (relatively) impatient then he/she eventually vanishes. The next main result of the paper, Theorem 4, strengthens Theorem 1 and shows that that the property that an agent eventually vanishes is robust. Moreover, an example is provided where both agents have correct beliefs and the more patient agent vanishes eventually -- this is also opposite to results obtained in complete market regime.
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