CONSTRUCTION OF STATIONARY MARKOV EQUILIBRIA IN A STRATEGIC MARKET GAME

This paper studies stationary noncooperatiue equilibria in an economy with fiat money, one nondurable commodity, countably many time-periods , no credit or futures market, and a measure space of agents-who may d iffer in their preferences and in the distributions of their (random) endowments. These agents are immortal, and hold fiat money as a means of hedging against the random fluctuations in their endowments of the commodity. In the aggregate, these fluctuations offset each other, and equilibrium prices are constant. We carry out an equilibrium analysis that focuses on distribution of wealth, on consumption, and on price formation. A careful analysis of the one-agent, infinite-horizon optim ization problem, and of the invariant measure for the associated optim ally controlled Markov chain, leads by aggregation to a stationary non cooperatiue or competitive equilibrium. This consists of a price for t he commodity and of a distribution of wealth across agents which, unde r appropriate simple strategies for the agents, stay fixed from period to period and preserve the basic quantities of the model. We hope tha t, in future work, we shall be able to address additional features of the model treated here, such as borrowing and lending at appropriate ( endogenously determined) interest rates, the endogenous production of commodity, overlapping generations of agents, and bankruptcy and treat ment of creditors.