CONSTRAINED SUBOPTIMALITY IN INCOMPLETE MARKETS - A GENERAL-APPROACH AND 2 APPLICATIONS

In this paper we re-examine generic constrained suboptimality of equil ibrium allocations with incomplete numeraire asset markets. We provide a general framework which is capable of resolving some issues left op en by the previous literature, and encompasses many kinds of intervent ion in partially controlled marl;et economies. In particular, we estab lish generic constrained suboptimality, as studied by Geanakoplos and Polemarchakis, even without an upper bound on the number of households . Moreover, we consider the case where asset markets are left open, an d the planner can make lump-sum transfers in a limited number of goods . We show that such a perfectly anticipated wealth redistribution poli cy, though consistent with the assumed incomplete financial structure, is typically effective.