Pablo F. Beker

Consumption dynamics in general equilibrium: A characterisation when markets are incomplete

We introduce a methodology for analysing infinite horizon economies with two agents, one good, and incomplete markets. We provide an example in which an agents equilibrium consumption is zero eventually with probability one even if she has correct beliefs and is marginally more patient. We then prove the following general result: if markets are effectively incomplete forever then on any equilibrium path on which some agents consumption is bounded away from zero eventually, the other agents consumption is zero eventually--so either some agent vanishes, in that she consumes zero eventually, or the consumption of both agents is arbitrarily close to zero infinitely often. Later we show that (a) for most economies in which individual endowments are finite state time homogeneous Markov processes, the consumption of an agent who has a uniformly positive endowment cannot converge to zero and (b) the possibility that an agent vanishes is a robust outcome since for a wide class of economies with incomplete markets, there are equilibria in which an agents consumption is zero eventually with probability one even though she has correct beliefs as in the example. In sharp contrast to the results in the case studied by Sandroni (2000) [29] and Blume and Easley (2006) [8] where markets are complete, our results show that when markets are incomplete not only can the more patient agent (or the one with more accurate beliefs) be eliminated but there are situations in which neither agent is eliminated.

The dynamics of efficient asset trading with heterogeneous beliefs

This paper analyzes the dynamic properties of portfolios that sustain dynamically complete markets equilibrium when agents have heterogeneous priors. We argue that the conventional wisdom that belief heterogeneity generates continuous trade and significant fluctuations in individual portfolios may be correct but it needs some qualifications. We consider an infinite horizon stochastic endowment economy populated by many Bayesian agents with heterogeneous priors over the stochastic process of the states of nature. Our approach hinges on studying the portfolios that decentralize Pareto optimal allocations. Since these allocations are typically history dependent, we propose a methodology to provide a complete recursive characterization when agents believe that the process of states of nature is i.i.d. but disagree about the probability of the states. We show that even though heterogeneous priors within that class can indeed generate genuine changes in the portfolios of any dynamically complete markets equilibrium, these changes vanish with probability one if the true process consists of i.i.d. draws from a common distribution and the support of some agents prior belief contains the true distribution. Finally, we provide examples in which asset trading does not vanish because either (i) no agent learns the true conditional probability of the states or (ii) some agent does not know the true process generating the data is i.i.d.

Are Inefficient Entrepreneurs Driven Out of the Market

This paper challenges the widespread belief that competitive markets favor entrepreneurs who operate efficient technologies. In the context of a dynamically incomplete markets model, I show that, ceteris paribus, entrepreneurs operating efficient technologies can be driven out of a competitive market by entrepreneurs operating inefficient technologies.

The dynamics of bidding markets with financial constraints

We develop a model of bidding markets with financial constraints a la Che and Gale [15] in which two firms choose their budgets optimally and we extend it to a dynamic setting over an infinite horizon. We provide three main results for the case in which the exogenous cash-flow is not too large and the opportunity cost of budgets is positive but arbitrarily low. First, firms keep small budgets and markups are high most of the time. Second, the dispersion of markups and “money left on the table” across procurement auctions hinges on differences, both endogenous and exogenous, in the availability of financial resources rather than on significant private information. Third, we explain why the empirical analysis of the size of markups based on the standard auction model may have a bias, downwards or upwards, positively correlated with the availability of financial resources. A numerical example illustrates that our model is able to generate a rich set of values for markups, bid dispersion and concentration.