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Computing Equilibria when Asset Markets are Incomplete
Donald J. Brown
Peter M. Demarzo
B. Curtis Eaves
Abstract
Existence of equilibrium with incomplete markets is problematic because demand functions are typically not continuous. Discontinuities occur at prices for which a marketed asset suddenly becomes redundant. We show that this discontinuity disappears if we allow an agent in the economy to introduce a new asset when such redundancies occur. This enables us to prove existence with incomplete markets using a standard path-following argument. Hence, available algorithms for path-following in $\mathbf{R}^K$ can be applied to compute equilibria in the GEI case. We demonstrate this by computing equilibrium for a numerical example.
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