Large economies with differential information and without free disposal.

Abstract

We consider exchange economies with a continuum of agents and differential information about finitely many states of nature. It was proved in Einy, Moreno, and Shitovitz (2001) that if we allow for free disposal in the market clearing (feasibility) constraints then an irre- ducible economy has a competitive (or Walrasian expectations) equilibrium, and moreover, the set of competitive equilibrium allocations coincides with the private core. However when feasibility is defined with free disposal, competitive equilibrium allocations may not be in- centive compatible and contracts may not be enforceable (see e.g. Glycopantis, Muir, and Yannelis (2002)). This is the main motivation for considering equilibrium solutions with exact feasibility. We first prove that the results in Einy, Moreno, and Shitovitz (2001) are still valid without free-disposal. Then, motivated by the issue of contracts’ execution, we adapt the incentive compatibility property introduced in Krasa and Yannelis (1994) and we prove that every Pareto optimal exact feasible allocation is incentive compatible, implying that contracts of competitive or core allocations are enforceable.Large exchange economies; Incentive Compatibility; Competitive and Core Allocations; Differential information;