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in L 1 unknowns. Since equations are typically nonlinear, having number

of unknowns less or equal than number of independent equations does not

ensure a solution exists.

such that p z(p) = 0 for all p. Then there exists p such that z(p ) 0:

pl + max f0; zl (p)g

Let 'l (p) = PL , l = 1; ::L

j=1 [pj + max f0; zj (p)g]

. Hence by

the Brouwer Fixed Point theorem there is a xed point p :

p + max f0; zl (p )g

pl = PL l , l = 1; ::L.

j=1 [pj + max f0; zj (p)g]

Then

X

L

zl (p )pl pj + max f0; zj (p )g = zl (p )pl + zl (p ) max f0; zl (p )g

j=1

X

0= zl (p ) max f0; zl (p )g ) zl (p ) 0 for all l = 1; :::; L:

l

zl (p ) < 0 i pl = 0:

z(p ) = 0:

problem: the consumersdemand is not dened for prices on the boundary of

L 1

(when the price of some good is zero). We need

P to use a limit argument,

considering z : L" 1 ! RL , for L" 1 p 2 RL+ : l pl = 1, pl " for all l ,

and taking limits as " ! 0.

3.3. COMPETITIVE EQUILIBRIUM 23

3.3.1 Uniqueness

Existence of a competitive equilibrium can be proved under quite general con-

ditions.3 Equilibria are however unique only under very strong restrictions.

Several examples of such restrictions are listed in the following.

The endowment distribution is Pareto e cient, and hence the only equilib-

rium is autarchic: xi = ! i for all i 2 I:

sumer exists) for all p and for given (mh )H

h=1 :

=)

0

zj (p ) > zj (p).

Note that gross substitution implies that the law of demand holds at

any equilibrium price. Gross substitution holds for instance for Cobb

Douglas and CES utility functions (provided < 1).

Let an economy be parametrized by the endowment vector ! 2 RLI ++ keeping

preferences (ui )i2I xed. Furthermore, normalize pL = 1 and eliminate the

L-th component of the excess demand. Then

L 1

z : R++ RLI

++ ! R

L 1

RLI

++ .

has rank L 1:

3

We shall leave this statement essentially unsubstantiated. General equilibrium theory,

for more than half a century, has considered this as one of its main objectives.

24 CHAPTER 3. ARROW-DEBREU EXCHANGE ECONOMIES

L 1

for any p 2 R++ such that z (p; !) = 0.

open set P such that p 2 P and for any p0 6= p 2 P , z (p0 ; !) 6= 0:

regularity of p, the Inverse function theorem - Local (see Math Appendix)

applied to the map z : RL++1 ! RL 1 , directly implies local uniqueness of p 2

RL++1 .

++

is regular.

full measure Lebesgue subset of RLI ++ .

Proof. The statement follows by the Transversality theorem (see Math

Appendix), if z t 0: We now show that z t 0: Pick an arbitrary agent

i 2 I: It will be su cient to show that, for any (p; !) 2 RL++1 RLI ++ such

that z(p; !) = 0; we can nd a perturbation d! i 2 RL such that dz =

D!i z(p; !)d! i , for any dz 2 RL 1 . Consider any perturbation d! i such that

L

d! i1 + pd! i 1 = 0; for d! i 1 = (! il )l=2 : Any such perturbation, leaves each

agent i 2 I demand unchanged and hence it implies D!i z(p; !)d! i = d! i 1 ,

for any arbitrary d! i 1 2 RL :

++ is a

smooth manifold (see Math Appendix) of dimension LI:

proposition. The Inverse function theorem - Global (see Math Appendix)

applied to z : RL++1 RLI

++ ! R

L 1

; directly implies that the set p 2 z 1 (0);

as a function of ! 2 RLI

++ , is a smooth manifold of dimension LI:

3.3. COMPETITIVE EQUILIBRIUM 25

The dierential techniques exploited to study generic local uniqueness can

be expanded to provide a general characterization of competitive equilibria

as a manifold parametrized by endowments. This characterization implies an

existence result. We sketch some of the analysis, just to provide the reader

with the avor of the arguments.

is dened as

i(p; !) = ( 1)L 1 sign jDp z (p; !)j :

The index i(!) of an economy (! i )i2I is dened as

X

i(!) = i(p; !):

p:z(p;!)=0

++ , i(!) = 1:

beyond the scope of this class. Let it su ce to say that the proof relies

crucially on the boundary property of excess demand. Adventurous reader

might want to look at Mas Colell (1985), section 5,6, p. 201-15.

particular, any regular economy ! 2 RLI

++ has at least one equilibrium.

L 1

R++ :

Proof. By contradiction. Suppose there exist an economy ! 2 RLI ++ with

no equilibrium. Then, ! 2 RLI ++ is regular, by denition of regularity - a

contradiction with previous corollary.

to study the simple case in which L = 2: In this case, then, z : R++ ! R.

The boundary properties of the excess demand z(p; !) imply that, for any

! 2 R2I

++ ;

z(p; !) ! +1 as p ! 0

z(p; !) ! L as p ! 1:

26 CHAPTER 3. ARROW-DEBREU EXCHANGE ECONOMIES

more, suppose ! is regular, and let the prices pj such that z(p; !) = 0 be

ordered, so that pj < pj+1 ; j = 1; 2; :::: Then @z(p;!)

@p

jp=p1 < 0: Actually,

n < 0 for j odd

@z(p;!)

@p p=pj : As a consequence, i(!) = 1:

> 0for j even

We can also try and give more sense of the arguments, o of the proof

of the Index theorem, required for this approach to the existence question.

Let ! 2 RLI ++ be an arbitrary regular economy. Pick an economy ! 2 R++

0 LI

L 1

such that there exist a unique price p 2 R++ such that z(p) = 0; and

Dp z(p) has rank L 1: One such economy can always be constructed by

choosing ! 0 2 RLI

++ to be a Pareto optimal allocation. In fact, [we can show

that] generic regularity holds in the subset of economies with Pareto optimal

endowments. Let t! + (1 t)! 0 ; for 0 t 1; represent a 1-dimensional

subset of economies. Let Z(p; t) be the map Z : RL++1 [0; 1] ! RL 1 induced

by Z(p; t) = z(p; t! + (1 t)! 0 ) for given (!; ! 0 ): We say that Z(p; t) is an

homotopy, or that z(p; !) and z(p; ! 0 ) are homotopic to each other. [We

can show that] DZ(p; t) has rank L 1 in its domain. It follows from the

Corollary of the Inverse function theorem - Global (see Math Appendix) that

the set (p; t) 2 Z 1 (0); is a smooth manifold of dimension 1: [We can show

that] prices p can, without loss of generality, be restricted to a compact set

P such that Z 1 (0) \ P [0; 1] = ?:4 As a consequence Z 1 (0) is a compact

smooth manifold of dimension 1: By the Classication theorem (see Math

Appendix), Z 1 (0) is then homeomorphic to a countable set of segments

in R and of circles S.5 Regularity of Z 1 (0) at the boundary, t = 0 and

t = 1 and the property that Z 1 (0) \ P [0; 1] = ? imply that at least one

component of Z 1 (0) is homeomorphic to a line with boundary at t = 0 and

t = 1: It looks confusing, but its easier with a few gures.

The only possible representation of Z 1 (0) is then as in the following

gure. Therefore: an equilibrium price p 2 P exists, for any t 2 [0; 1];

and furthermore, for a full-measure Lebesgue subset of [0; 1] the number of

equilibria is odd.

4

This is a consequence of the boundary conditions of excess demand systems. In other

words, we could adopt the alternative normalization, restricting prices in the simplex ;

a compact set, and show that equilibrium prices are never on @ :

5

Along a component of Z 1 (0) (a line or a circle), a change in index occurs when the

manifold folds.

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