Coarse Competitive Equilibrium and Extreme Prices
- (pp. 109-37)
AbstractWe introduce a notion of coarse competitive equilibrium, to study agents' inability to tailor their consumption to prices. Our goal is to incorporate limited cognitive ability (in particular limited attention, memory, and complexity) into the analysis of competitive equilibrium. Compared to standard competitive equilibrium, our concept yields more extreme prices and, when all agents have the same endowment, riskier allocations. We provide a tractable model suitable for general equilibrium analysis as well as asset pricing.
CitationGul, Faruk, Wolfgang Pesendorfer, and Tomasz Strzalecki. 2017. "Coarse Competitive Equilibrium and Extreme Prices." American Economic Review, 107 (1): 109-37. DOI: 10.1257/aer.20141287
- D11 Consumer Economics: Theory
- D51 Exchange and Production Economies
- D15 Intertemporal Household Choice; Life Cycle Models and Saving
- G10 General Financial Markets: General (includes Measurement and Data)