Mathematics and Financial Economics

, Volume 12, Issue 4, pp 517–539 | Cite as

Existence of a Radner equilibrium in a model with transaction costs

  • Kim WestonEmail author


We prove the existence of a Radner equilibrium in a model with proportional transaction costs on an infinite time horizon and analyze the effect of transaction costs on the endogenously determined interest rate. Two agents receive exogenous, unspanned income and choose between consumption and investing into an annuity. After establishing the existence of a discrete-time equilibrium, we show that the discrete-time equilibrium converges to a continuous-time equilibrium model. The continuous-time equilibrium provides an explicit formula for the equilibrium interest rate in terms of the transaction cost parameter. We analyze the impact of transaction costs on the equilibrium interest rate and welfare levels.


Transaction costs Radner equilibrium Shadow prices Incompleteness 

Mathematics Subject Classification

91B51 91B25 

JEL Classification

D52 G12 G11 


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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of MathematicsRutgers UniversityPiscatawayUSA

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