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A Central-Planning Approach to Dynamic Incomplete-Market Equilibrium ∗
| Content Provider | Semantic Scholar |
|---|---|
| Author | Dumas, Bernard Maenhout, Pascal J. |
| Copyright Year | 2002 |
| Abstract | We show that a central planner with two selves, or two “pseudo welfare functions”, are sufficient to deliver the market equilibrium that prevails among any (finite) number of heterogeneous individual agents acting competitively in an incomplete financial market. Furthermore, we are able to exhibit a recursive formulation of the two-central planner problem. In that formulation, every aspect of the economy can be derived one step at a time, by a process of backward induction as in dynamic programming. Dynamic asset pricing increasingly considers models with incomplete markets and heterogeneity in an attempt to improve over the empirical performance of benchmark complete-market representative-agent models. Numerous authors have pointed out the difficulties faced when solving these models.1 In this paper, we aim to find a technique for computing an equilibrium in an incomplete financial market, that is less onerous than the fixed-point tâtonnement process. The tâtonnement process presents the major drawback that a stochastic process for securities prices must be postulated ab initio to start the procedure of obtaining optimal portfolios. The trial-and-error procedure would wander in a vast space of stochastic processes. It is a hopeless undertaking. Direct calculation of equilibrium makes sense only in special cases in which the equilibrium has some properties that are known a priori. ∗We are grateful to Domenico Cuoco, to seminar participants at HEC, University of Amsterdam, Erasmus University Rotterdam, ISCTE, Carnegie Mellon University and Wharton for comments, and to Raman Uppal and Tan Wang for numerous and stimulating exchanges of view and correspondence on this topic. †INSEAD, Finance Department, Boulevard de Constance, 77305 Fontainebleau Cedex, France. Email: bernard.dumas@insead.edu. ‡Dumas also has secondary affiliations with the Wharton School, the NBER and the CEPR. §INSEAD, Finance Department, Boulevard de Constance, 77305 Fontainebleau Cedex, France. Email: pascal.maenhout@insead.edu. 1Early examples includes Telmer (1993), Lucas (1994), Heaton and Lucas (1996), Krusell and Smith (1998) and Marcet and Singleton (1999). Levine and Zame (2001) show that market incompleteness is unimportant in the absence of aggregate risk. In the present paper we incorporate aggregate risk. |
| File Format | PDF HTM / HTML |
| Alternate Webpage(s) | http://www.dklevine.com/archive/dumas-2nddraft_apr2002.pdf |
| Language | English |
| Access Restriction | Open |
| Subject Keyword | Ab initio quantum chemistry methods Aggregate data Backward induction Benchmark (computing) CRC-based framing Choice Behavior Dave Grossman (game developer) Dynamic programming Earl Levine Email Feeling hopeless Fixed-Point Number Genetic Heterogeneity Intertemporal budget constraint Kind of quantity - Equilibrium Numerous OS-tan Partial Point of sale Programming paradigm Pseudo brand of pseudoephedrine Raman scattering Recursion Risk aversion Stimulation (motivation) Stochastic Processes Stochastic process Walrasian auction |
| Content Type | Text |
| Resource Type | Article |
