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Competitive Equilibrium Under Uncertainty

Roy Radner

Abstract

This paper explores how far one can go in applying the modern theory of competitive equilibrium to the case of uncertainty. In the first part, the analyses of Arrow and Debreu are extended to the case in which different economic agents may have different information about the environment. The second part deals with the limitations of the Arrow-Debreu type of model, and discusses the difficulties associated with nonconvexities in the production of information, with information generated by spot markets, and with limitations on the computational capacities of economic agents. It is argued that the demand for liquidity arises from, among other things, the last two phenomena, and thus does not appear to be amenable to analysis by means of the "neoclassical" theory of competitive equilibrium.