Competitive Equilibria of Economies with a Continuum of Consumers and Aggregate Shocks

Abstract

This paper studies competitive equilibria of a production economy with aggregate productivity shocks and with a continuum of consumers subject to borrowing constraints and individual labor endowment shocks. The dynamic economy is described in terms of sequences of aggregate distributions. The existence of competitive equilibrium is proven and a recursive characterization is established. In particular, it is shown that for any competitive equilibrium, there is a first period payoff equivalent competitive equilibrium that is generated by a recursive equilibrium with the state space including expected discounted utilities.