General Equilibrium in a Heterogeneous-Agent Incomplete-Market Economy with Many Consumption Goods and a Risk-Free Bond

Abstract

General equilibrium models have been extensively studied in economics, with seminal works by Arrow, Debreu, McKenzie, Gale, and Nikaido providing a proof for the existence of general equilibrium in a pure exchange economy. However, while the recently popular dynamic incomplete-markets models have attracted attention, the existence results for these models have remained limited. In “General equilibrium in a heterogeneous-agent incomplete-market economy with many consumption goods and a risk-free bond,” Light extends some general equilibrium results to a dynamic incomplete-market economy with many consumption goods and a risk-free bond. Under mild conditions, using a well-known excess demand approach, the article establishes the existence of general equilibrium, showing that the methods used to prove existence in the static pure exchange economy can be used in the much more complicated dynamic incomplete-market setting. The article also establishes uniqueness and comparative statics results for the special case where the agents’ preferences can be represented by a constant elasticity of substitution utility function with an elasticity of substitution greater than or equal to one.