SFB 303 Discussion Paper No. A - 216
Author: Geanakoplos, J.D., and H.M. Polemarchakis
Title: Observability and Optimality
Abstract: Observability of an individual's excess demand function for assets and commodities as all prices and
revenue vary suffices in order to recover his von Neumann-Morgenstern utility function. This is generically the
case even when the asset market is incomplete and the cardinal utility indices state independent, as long as there
are at least two commodities traded in spot markets at each state of nature.On the contrary, if the response of
individuals' excess demand for assets as prices in spot commodity markets vary is not observable, recoverability
fails when the asset market is incomplete. In particular, it is not possible to contradict the claim that the
competitive allocation is fully optimal in spite of the incompleteness of the asset market.This provides a
characterization of the efficacy of intervention in an economy with an incomplete asset market based on the
information available to a planner from the observable behavior of individuals.
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