INCOMPLETE MARKETS OVER AN INFINITE-HORIZON - LONG-LIVED SECURITIES AND SPECULATIVE BUBBLES

This paper studies sequence economies over an infinite horizon with ge neral security structures. Assumptions are given under which a pseudo- equilibrium exists for all economies and an equilibrium exists for a d ense set of (appropriately parameterized) economies. Under these assum ptions the indebtedness of the agents in equilibrium can be limited ei ther by an explicit bound on their debts or by a transversality condit ion limiting the asymptotic growth of their debts. The qualitative pro perties of equilibrium prices of infinite-lived securities are studied : the prices of infinite-lived securities in zero net supply are shown to permit speculative bubbles and the existence of bubbles can affect the equilibrium allocation. The prices of securities in positive supp ly (equity contracts) cannot have speculative bubbles: the extent of s peculation in this class of model is thus severely limited.