Growth in Economies With Non Convexities: Sunspots and Lottery Equilibria, Theory and Examples

Summary

We investigate the relation between lotteries and sunspot allocations in a dynamic economy where the utility functions are not concave. In an intertemporal competitive economy, the household consumption set is identified with the set of lotteries, while in the intertemporal sunspot economy it is the set of measurable allocations in the given probability space of sunspots. Sunspot intertemporal equilibria whenever they exist are efficient, independently of the sunspot space specification. If feasibility is, at each point in time, a restriction over the average value of the lotteries, competitive equilibrium prices are linear in basic commodities and intertemporal sunspot and competitive equilibria are equivalent. Two models have this feature: Large economies and economies with semi-linear technologies. We provide examples showing that in general, intertemporal competitive equilibrium prices are non-linear in basic commodities and, hence, intertemporal sunspot equilibria do not exist.

The competitive static equilibrium allocations are stationary, intertemporal equilibrium allocations, but the static sunspot equilibria need not to be stationary, intertemporal sunspot equilibria. We construct examples of non-convex economies with indeterminate and Pareto ranked static sunspot equilibrium allocations associated to distinct specifications of the sunspot probability space. Furthermore, we show that there exist large economies with a countable infinity of Pareto ranked static sunspot equilibrium allocations with aggregate pro capita consumption invariant both across equilibria as well as across realizations of the uncertainty. This implies that these equilibria are equilibria of a pure exchange economy with non-convex preferences.

We thank Herakles Polemarchakis for helpful conversations on the topic. The research of Aldo Rustichini was supported by the NSF grant NSF/SES-0136556.