Lotteries, sunspots, and incentive constraints

Timothy J. Kehoe, David K. Levine, Edward C. Prescott

Research output: Contribution to journalArticle

21 Citations (Scopus)

Abstract

We study a prototypical class of exchange economies with private information and indivisibilities. We establish an equivalence between lottery equilibria and sunspot equilibria and show that the welfare and existence theorems hold. To establish these results, we introduce the concept of the stand-in consumer economy, which is a standard, convex, finite consumer, finite good, pure exchange economy. With decreasing absolute risk aversion and no indivisibilities, we prove that no lotteries are actually used in equilibrium. We provide a simple numerical example with increasing absolute risk aversion in which lotteries are necessarily used in equilibrium. We also show how the equilibrium allocation in this example can be implemented in a sunspot equilibrium. Journal of Economic Literature Classification Numbers: D11, D50, D82.

Original languageEnglish (US)
Pages (from-to)39-69
Number of pages31
JournalJournal of Economic Theory
Volume107
Issue number1
DOIs
StatePublished - Nov 1 2002

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Lottery
Incentives
Sunspots
Sunspot equilibria
Indivisibility
Exchange economy
Economics
Private information
Absolute risk aversion
Decreasing absolute risk aversion
Equivalence

Cite this

Lotteries, sunspots, and incentive constraints. / Kehoe, Timothy J.; Levine, David K.; Prescott, Edward C.

In: Journal of Economic Theory, Vol. 107, No. 1, 01.11.2002, p. 39-69.

Research output: Contribution to journalArticle

Kehoe, Timothy J. ; Levine, David K. ; Prescott, Edward C. / Lotteries, sunspots, and incentive constraints. In: Journal of Economic Theory. 2002 ; Vol. 107, No. 1. pp. 39-69.
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