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Arrow-Debreu exchange
economies
X
I X
I
xi !i
i=1 i=1
In the special case in which L = 2, I = 2, feasible allocations can be graphi-
cally represented using the Edgeworth Box.
Unless otherwise noted, we shall impose the following strong (but not
outrageous) assumptions.
Assumption 2 U i : RL+ ! R is C2 in any open subset of RL+ ;strictly monotonic
in its arguments and strictly quasi-concave. Furthermore, ! 2 RLI++ :
U i (^
xi ) U i (xi ) for all i, > for at least one i.
1
We are conscious of the notational abuse.
17
18 CHAPTER 3. ARROW-DEBREU EXCHANGE ECONOMIES
Pareto dominance denes a (social) preference relation over the set of allo-
cations RLI
+ , which is however incomplete.
PE allocations are solutions of the problem:
i i
max
P x iU (xP) i
ix i!
s.t. i0 i0 i0
U (x ) U for all i0 6= i
0
for some given U i i0 6=i :
The focs (for an interior solution) of this problem are:
rU i =
i0 0
rU i = for all i0 6= i
X X
xi = !i
i i
0
where i i0 6=i and are the Lagrange multipliers of the two sets of con-
straints above. Thus
i0 0
rU i = rU i for all i0 6= i
and utility gradients are co-linear for all agents (Marginal rates of substitu-
tion are equalized across agents).
0
Varying the values of U i for i0 6= i we obtain the set Pareto e cient
allocations, the Pareto frontier.
Let the Utility possibility set be the image of the feasible allocations in
the space of utility levels
( )
I
X X
U = U 2 RI U U i (xi ) i=1 , for some x 2 RLI
+ such that xi !i
i i
Furthermore,
i
i0
i0
= ; for any i0 6= i 2 I:
that is,
X
i
U (x) = arg max Ui
i2I
s.t. U 2 U:
Trivially, then
X
i
x = arg max U i (xi )
i2I
X X
i i
s.t. x !:
i i
smoothness: z (p; !) is C 1 ;
homogeneity of degree 0: z ( p; !) = z (p; !) ;for any > 0;
Walras Law: pz (p; !) = 0; 8p >> 0;
lower boundedness: 9s such that zl (p; !) > s, 8l 2 L;
boundary property:
pn ! p 6= 0; with pl = 0 for some l; ) max fz1 (pn ; !); :::; zL (pn ; !)g ! 1: