Monday, November 14, 2011

16 November 2011: General Equilibrium, Wariness and Bubbles

Aloisio Araujo
IMPA Brazil

We say that a consumer is wary if she overlooks gains but not losses
in remote sets of dates or states. We formulate this by requiring
preferences to be upper but not lower Mackey semi-continuous and
Bewley's result on existence of Arrow-Debreu equilibrium whose prices
are not necessarily countably additive holds. We relate wariness to
some concepts studied in decision theory like lack of myopia and
ambiguity aversion. Wary infinite lived agents are not impatient, have
optimality conditions, in the form of weaker transversality
conditions, that allow them to be creditors at infinity and bubbles
occur for positive net supply assets completing the markets. In a two
date economy, with infinite states, wary agents are not myopic and
bubbles occur, as asset prices do not have to equal the series of
returns weighted by state prices. A large class of efficient
allocations can only be implemented with asset bubbles. Pessimistic
attitudes lead agents to overvalue assets or durable goods with
hedging properties, like gold.

Date: November 16, 2011
Time: 03:30 P.M.

Conference Room
Indian Statistical Institute Delhi Centre,
7, S. J. S. Sansanwal Marg,
New Delhi-110016 (INDIA)


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