COWLES FOUNDATION FOR RESEARCH IN
ECONOMICS Box 208281
COWLES FOUNDATION DISCUSSION PAPER NO. 901 "Observability and Optimality" John Geanakoplos and Heracles M. Polemarchakis October 1988 Observability of an individual’s excess demand function for assets and commodities as all prices and revenue vary suffices in order to recover his von Neumann-Morgenstern utility function. This is generically the case, even when the asset market is incomplete and the cardinal utility indices state dependent, as long as there are at least two commodities traded in spot markets at each state of nature. On the contrary, if the response of individuals’ excess demand for assets as prices in spot commodity markets vary is not observable, recoverability fails when the asset market is incomplete. In particular, it is not possible to contradict the claim that the competitive allocation is fully optimal in spite of the incompleteness of the asset market. JE Classification: 021, 022 Keywords: Utility function, asset market, equilibrium allocation |
