Coarse Competitive Equilibrium and Extreme Prices
Faruk Gul, Wolfgang Pesendorfer, Tomasz Strzalecki
American Economic Review · 2017 · Volume 107 · Issue 1
Abstract
We 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.
Keywords
Consumer Economics: Theory, Exchange and Production Economies, Intertemporal Household Choice, Life Cycle Models and Saving, General Financial Markets: General (includes Measurement and Data)
Enable JavaScript for citation tools and additional paper interactions.