Published papers
19. “Uniqueness of equilibrium with solvency constraints under gross substitution”, with G. Bloise, Journal of Mathematical Economics, 2015, vol. 61, 287-295.
Abstract
Under a gross substitution assumption, we prove existence and uniqueness of competitive equilibrium for an infinite-horizon exchange economy with limited commitment and complete financial markets. Risk-sharing is limited as only a part of the private endowment can be used as collateral to secure debt. The unique equilibrium is Markovian with respect to a minimal state space consisting of exogenous shocks and Negishi’s welfare weights. We represent equilibrium dynamics via a monotone operator acting on entire wealth distribution functions. We construct a fixed point of this operator generating a lower and an upper orbit and proving coincidence of accumulation points.
18. “Group stability in matching with interdependent values”, with A. Chakraborty, M. Ostrovsky, Review of Economic Design, 2015, vol. 19, 3-24.
Abstract
We study two-sided many-to-one matching markets with interdependent valuations and imperfect information held by one side of the market. The other side has common and known preferences over potential mates. In this setting, pairwise stability does not imply group stability: mechanisms that are stable with respect to deviations by pairs of agents may be vulnerable to deviations by groups. We formalize a notion of group stability and construct a “modified serial dictatorship” mechanism that implements group stable matchings. We further discuss the robustness of our notion of stability and examine efficiency properties of modified serial dictatorship.
17. “Refinements and incentive efficiency in Walrasian models of insurance economies”, with P. Siconolfi, Journal of Mathematical Economics, 2014, vol. 50, 208-218.
Abstract
The literature on Walrasian markets in large economies with adverse selection has used various equilibrium refinements, but has obtained no general incentive efficiency of equilibrium, namely when cross-subsidies are needed for efficiency. We show that the same refined equilibria may also be incentive inefficient, even when mechanisms that allow for such cross-subsidies are priced and can be traded. In the process, we also prove existence of some type of forward induction equilibria in this context.
16. “Recursive equilibria in stochastic OLG economies: Incomplete markets”, with P. Siconolfi, Journal of Mathematical Economics, 2012, vol. 48, 322-337.
Abstract
We prove generic existence of recursive equilibrium for overlapping generations economies with uncertainty and incomplete financial markets. Generic here means in a residual set of utilities and endowments. The result holds provided there is sufficient intragenerational household heterogeneity, and transition probabilities and the asset payoff matrix satisfy mild regularity conditions. The paper also provides a new methodological technique to establish comparative statics, or perturbation, properties in such environments.
7. “General equilibrium, incomplete markets and sunspots: A symposium in honor of David Cass: Guest editors' introduction”, with J. Donaldson, H. Polemarchakis, P. Siconolfi, S. Spear , Economic Theory, 2004, vol. 24, 465-469.
Abstract
This special edition of Economic Theory honors David Cass, one of ET ’s founding editors, on the 30th anniversary of his joining the faculty at the University of Pennsylvania’s Economics Department. The contributions to this volume are, for the most part, from Dave’s students or co-authors, and we hope they communicate both to Dave and to the economics profession generally the high regard those of us who have trained under Dave’s tutelage or worked with him on research have for him.
15. “Two-sided matching with interdependent values”, with A. Chakraborty and M. Ostrovsky, Journal of Economic Theory, 2010, vol. 145, 85-105.
Abstract
We introduce and study two-sided matching with incomplete information and interdependent valuations on one side of the market. An example of such a setting is a matching market between colleges and students in which colleges receive partially informative signals about students. Stability in such markets depends on the amount of information about matchings available to colleges. When colleges observe the entire matching, a stable matching mechanism does not generally exist. When colleges observe only their own matches, a stable mechanism exists if students have identical preferences over colleges, but may not exist if students have different preferences.
14. “Recursive equilibria in stochastic OLG economies”, with P. Siconolfi, Econometrica, 2010, vol. 78, 309–347.
Abstract
We prove the generic existence of a recursive equilibrium for overlapping-genera- tions economies with uncertainty. “Generic” here means in a residual set of utilities and endowments. The result holds provided there is a sufficient number of potentially different individuals within each cohort.
13. “On the nonexistence of recursive equilibrium in stochastic OLG economies”, with P. Siconolfi, Economic Theory, 2008, vol. 37, 417-37.
Abstract
We study a class of stochastic Overlapping generations (OLG) economies that have one-memory equilibria, that is equilibria that are determined by the current and past realizations of the states of uncertainty. This class is negligible, but important. In particular, it contains all the known examples of nonexistence of recursive equilibrium. We show that, within this restricted domain, the existence of recursive equilibrium is actually typical, and such examples are therefore nonrobust.
12. “The dynamics of wealth distribution with asymmetric incentives and endogenous matching”, Economic Theory, 2007, vol. 33, 243-261.
Abstract
In a dynastic economy with warm-glow bequest individuals can form firms in a frictionless matching market. Contracts within firms are subject to moral hazard. Production tasks differ in incentive intensity and the matching market is open until production takes place. The credit market is perfect.
11. “Short-memory equilibrium in stochastic OLG economies”, with P. Siconolfi, Journal of Economic Theory, 2007, vol. 134, 448-469.
Abstract
In stochastic OLG exchange economies, we show that short-memory equilibria-the natural extension from deterministic economies of steady states, low-order cycles, or finite state-space stationary sunspots equilibria-fail to exist generically in utilities. As a result, even with independent and identically distributed exogenous shocks there is serial correlation in endogenous economic variables in equilibrium. This arises even if utilities are time-separable, some goods inferior, and there are no technological lags. Hence, the origins of economic fluctuations can be traced only to the demographic structure of a heterogeneous agent, multiple-good economy.
10. “The taxation of trades in assets”, with H. Polemarchakis and M. Tirelli, Journal of Economic Theory, 2006, vol. 126, 299-313.
Abstract
When the asset market is incomplete, there typically exist taxes on trades in assets that are Pareto improving. This fiscal policy is anonymous, it is fully and correctly anticipated by traders, and it results in ex post Pareto optimal allocations; as such, it improves over previously proposed constrained interventions.
9. “Excess price volatility and financial innovation”, with K. Schmedders, Economic Theory, 2005, vol. 26, 559-588.
Abstract
In a three-period finite exchange economy with incomplete financial markets and retrading, we study the effects of the degree of incompleteness and of changes in the financial structure on asset price volatility. In what are essentially no aggregate risk economies, asset price volatility is a sunspot-like phenomenon. If markets are completed by financial innovation, asset price volatility reduction is generic. With aggregate risk, changes in the financial structure affect asset price volatility through a pecuniary externality. Financial innovation which decreases equilibrium price volatility can be crafted under conditions of sufficient market incompleteness. Numerical examples illustrate the role of risk aversion for volatility changes and show that, with or without aggregate risk, reducing the degree of incompleteness per se is not necessarily associated with a volatility reduction.
8. “Occupational choice, incentives and wealth distribution”, with A. Chakraborty, Journal of Economic Theory, 2005, vol. 122, 206-224.
Abstract
We consider a model of occupational choice in large economies where individuals differ in their wealth endowment. Individuals can remain self-employed or engage in productive matches with another individual, i.e., form firms. Matches are subject to a moral hazard problem with limited liability. The division of the gains from such matches is determined by competitive forces. When the incentive problem is asymmetric, matches are typically wealth-heterogeneous, with richer individuals choosing the occupation for which incentives are more important. The utilities attained within a match depend on the wealth distribution and changes in the latter give rise to ‘trickle down’ effects.
7. “Pooling and endogenous market incompleteness”, with A. Villanacci, Economic Theory, 2004, vol. 24, 549-560.
Abstract
We study a financial market economy with a continuum of borrowers and pooling of borrowers’ promises. Under these conditions and in the absence of designing costs, utility-maximizing decisions of price-taking borrowers may lead to financial market incompleteness. Parametrizing equilibria through the borrowers’ no-arbitrage beliefs, we link expectations to the financial market structure. Markets are complete if and only if borrowers’ beliefs are homogeneous. Price-taking behavior causes a coordination problem which in turn yields indeterminacy and inefficiency of equilibrium allocations.
6. “Competitive equilibrium with moral hazard in economies with multiple commodities”, with A. Villanacci, Journal of Mathematical Economics, 2002, vol. 38, 117-148.
Abstract
We study an economy with competitive commodity markets and exclusive pairwise contractual relations with moral hazard, where both the principal and the agent can be risk averse. We show existence of equilibria and their generic constrained suboptimality, by means of a change in the compensation schemes. Such suboptimality occurs provided the number of commodities is sufficiently large relative to the number of states and pair types, and there are at least three future states of the world.
5. “Continua of underemployment equilibria reflecting coordination failures, also at walrasian prices”, with H. Cres, J. Dreze, P.J.J. Herings and A. Villanacci, Journal of Mathematical Economics, 2002, vol. 36, 169-200.
Abstract
In this paper the existence of unemployment is partly explained as being the result of coordination failures. It is shown that as a result of self-fulfilling pessimistic expectations, even at Walrasian prices, a continuum of equilibria results, among which an equilibrium with approximately no trade and a Walrasian equilibrium. These coordination failures also arise at other price systems, but then unemployment is the result of both a wrong price system and coordination failures. Some properties of the set of equilibria are analyzed. Generically, there exists a continuum of non-indifferent equilibrium allocations. Under a condition implied by gross substitutability, there exists a continuum of equilibrium allocations in the neighborhood of a competitive allocation, when prices are Walrasian. For a specialized economy, a dynamic illustration is offered.
4. “Existence and regularity of partially revealing rational expectations equilibrium in finite economies”, with A. Villanacci, Journal of Mathematical Economics, 2000, vol. 34, 1-26.
Abstract
We consider an incomplete financial market exchange economy with nominal assets and a finite number of traders, goods, states and signals. In this framework, we prove the existence and regularity of rational expectations equilibria for any informational structure derived from prices. We provide a proof that completes the characterization of existence of equilibrium in these economies, in the following sense: while Polemarchakis and Siconolfi [Polemarchakis, H., Siconolfi, P., 1993. Asset markets and the information revealed by prices. Economic Theory, Vol. 3, pp. 645–661.] show existence only of fully nonrevealing equilibrium, and Rahi [Rahi, R., 1995. Partially revealing rational expectations equilibria with nominal assets. Journal of Mathematical Economics, Vol. 24, pp. 137–146.] finds partially revealing equilibria for all economies satisfying a restrictive condition on the traders' equilibrium information structure, we dispense with Rahi's condition, and offer a strategy of proof that applies directly to all cases of revelation. Our proof of existence is based on homotopy methods. Given the way we construct our proof, we can easily link the asymmetric information model to the linear restricted participation models. We show how to apply the “Cass trick” in asymmetric information economies to control for asset prices, even if all agents are restricted, that is, partially informed.
3. “Incomplete markets, allocative efficiency and the information revealed by prices”, with A. Villanacci, Journal of Economic Theory, 2000, vol. 90, 222-253.
Abstract
We compare rational expectations equilibria with different degrees of information revelation through prices. These equilibria arise in a two-period exchange economy with finitely many states and signals, multiple commodities and incomplete financial markets for nominal assets. We show that there are always equilibria where information is redundant in the sense of being of no value to the uninformed traders. We give conditions under which for a generic set of economies, parametrized by endowments and utilities, there exist open sets of equilibria for which allocative and informational efficiency are independent, with implications for monetary policy.
2. “Constrained suboptimality in incomplete markets: a general approach and two applications” (with A.Kajii and A.Villanacci), Economic Theory, 1998, vol. 11, 495-521.
Abstract
In this paper we re-examine generic constrained suboptimality of equilibrium allocations with incomplete numeraire asset markets. We provide a general framework which is capable of resolving some issues left open by the previous literature, and encompasses many kinds of intervention in partially controlled market economies. In particular, we establish generic constrained suboptimality, as studied by Geanakoplos and Polemarchakis, even without an upper bound on the number of households. Moreover, we consider the case where asset markets are left open, and the planner can make lump-sum transfers in a limited number of goods. We show that such a perfectly anticipated wealth redistribution policy, though consistent with the assumed incomplete financial structure, is typically effective.
1. “Pareto improving financial innovation in incomplete markets”, with D. Cass , Economic Theory, 1998, vol. 11, 467-494.
Abstract
In this paper we develop a differential technique for investigating the welfare effects of financial innovation in incomplete markets. Utilizing this technique, and after parametrizing the standard competitive, pure-exchange economy by both endowments and utility functions, we establish the following (weakly) generic property: Let S be the number of states, I be the number of assets and H be the number of households, and consider a particular financial equilibrium. Then, provided that the degree of market incompleteness is sufficiently larger than the extent of household heterogeneity, S−I≥2H−1 [resp. S−I≥H+1], there is an open set of single assets [resp. pairs of assets] whose introduction can make every household better off (and, symmetrically, an open set of single assets [resp. pairs of assets] whose introduction can make them all worse off ). We also devise a very simple nonparametric procedure for reducing extensive household heterogeneity to manageable size, a procedure which not only makes our restrictions on market incompleteness more palatable, but could also prove to be quite useful in other applications involving smooth analysis.
Chapters in books
“Guest Editors’ Introduction”. In: “Essays in Dynamic General Equilibrium Theory. A Festschrift in Honor of D. Cass”, A. Citanna, J. Donaldson, H. Polemarchakis, P. Siconolfi, S. Spear (Ed.s), Springer, New York, 2005.
“Equilibrium theory”, in Encyclopedia of Economics and Actuarial Sciences, Kluwer, 2004.
“Moral hazard and linear contracts: economies with idiosyncratic risks”. In: Advances in Economic Design, M. Sertel, S. Koray (eds.), Springer, New York, 2003.
“The impact of a new futures contract on risk premia in the term structure: an APT analysis for French government bonds” with R.Rovelli. In: Financial markets liberalization and the role of banks, by V. Conti and R.Hamaui (eds.), Cambridge University Press, Cambridge, 1993.