COMPUTING EQUILIBRIA WHEN ASSET MARKETS ARE INCOMPLETE

Existence of equilibrium with incomplete markets is problematic becaus e demand functions are typically not continuous. Discontinuities occur at prices for which a marketed asset suddenly becomes redundant. We s how that this discontinuity disappears if we allow an agent in the eco nomy to introduce a new asset when such redundancies occur. This enabl es us to prove existence with incomplete markets using a standard path -following argument. Hence, available algorithms for path-following in R(K) can be applied to compute equilibria in the GEI case. We demonst rate this by computing equilibrium for a numerical example.