Journal of Mathematical Economics 19 (1990) 69-93.

North-Holland

SOLVING SYSTEMS OF SIMULTANEOUS EQUATIONS IN

ECONOMICS*

John GEANAKOPLOS
Co&s Foundation, Yale University, New Haven, CT 06520-2125, USA

Wayne SHAFER
University of Southern Calijornia, Los Angeles, CA 900894152, USA

Submitted December 1987, accepted April 1989

We show that there is a broad range of systems of simultaneous equations that arise in
economics as descriptions of equilibrium that can be solved in elementary fashion via degree
theory. Some of these systems are not susceptible to analysis by standard Brouwer fixed point
methods. Two of our applications are to general equilibrium with incomplete markets, and to
non-convex production with non-competitive pricing rules.

1. Introduction

Equilibrium in economic models is often described by a solution or zero to

a system of simultaneous equations: z: N+[W’. The standard technique for
proving the existence of equilibrium is to transform the system by finding a
function f: N-+N, where N is the closure of N, such that f(x) =x if and only
if z(x) =O. If f is continuous and IV is homeomorphic to a compact, convex
set, then by Brouwer’s fixed point theorem, f must indeed leave some Xe N
fixed.
This fixed point approach works especially well for the Walrasian system
where N is S’;:, the interior of the (I- 1)-simplex, and z is a continuous
function that is bounded from below, satisfying Walras Law: z(p) .p=O for
PES:-:, and a boundary condition such as: pn+p E ~3s:: only if (z(p,)I+ co.
Indeed, as Uzawa (1962) has pointed out, the Gale-Nikaido-Debreu proposi-
tion that every Walrasian system has a solution is trivially equivalent to
Brouwer’s fixed point theorem. It is well-known that the Arrow-Debreu
model of consumer general equilibrium, with strictly convex and monotonic
preferences, gives rise to a Walrasian system. Furthermore, from the

*This work was supported in part by NSF grants SES 88-12051 and SES 87-09990.

03044068/9O/.S3.50 0 1990, Elsevier Science Publishers B.V. (North-Holland)

70 J. Geanakoplos and W. Shafer, Systems of simultaneous equations

Sonnenschein-Debreu-Mantel theorems on the arbitrariness of Arrow-

Debreu excess demand, it follows that the existence of equilibrium for all
strictly convex and monotonic Arrow-Debreu economies is also equivalent
to Brouwer’s fixed point theorem. Note that convexity hypotheses occur in
two separate places in the Arrow-Debreu model. Applied to consumer
preferences, they guarantee continuity of all the individual, and hence the
aggregate, excess demand functions. Secondly, they guarantee that the set of
endogenous variables (prices, etc.) is convex, so that Brouwer’s fixed point
theorem is applicable. For a history of the application of Brouwer’s theorem
to the Walrasian system and Arrow-Debreu economies following McKenzie
(1954) and Arrow and Debreu (1954), see Debreu (1982).
The fixed point method is precisely strong enough to solve the Walrasian
system, but there are other classes of economic models in which the space of
endogenous variables need not be convex. For example, the excess demand z
in a production economy depends on prices and the production choice y.
The production choice itself may be constrained to maximize profits in some
(non-convex) set Y at the prices p, or to satisfy some other criterion, such as
marginal or average cost pricing, given by p. In the theory of general
equilibrium with incomplete asset markets, excess demand may be thought of
as depending on the prices p, and a k-dimensional subspace L of Rs which is
contrained by p in the sense that L contains the span of the columns of a
matrix M(p).
More generally, let N be a subset of S’;: x A, where A is an auxiliary set
of constraining variables. Let z: N +R’ represent an economic system of
simultaneous equations. Our purpose is to give a sufficient condition for
_- - -
there to be a solution (~,a) EN satisfying z(p,a) =O. In the special case that
N is the graph of a continuous function cp:Sy: +A, so that N = Graph cp=
{(p, cp(p))Ip~ Sy:), the analysis reduces to the Walrasian system, for which
Brouwer’s theorem is applicable, provided that Walrasian-like hypotheses are
made about z. However, when N has a more complicated structure, a more
powerful technique than Brouwer’s theorem is required. For such N, it is not
even clear how to formulate the equation z(p, a) = 0 as a fixed point problem.
We will show, nevertheless, that under Walrasian-like assumptions on z, to
guarantee the existence of a solution it suffices that (1) N be an (1--l)-
dimensional topological manifold; (2) the projection map proj, : N-ST:
given by proj,(p,a) =p is proper; and (3) deg(proj,) is non-zero. It is possible
to find such sets N that are not homeomorphic to any convex body.
There are two ways in which N naturally arises which shall be of central
concern to us. In the first we are given a correspondence @:S’;: -+A and N
is the graph of @, N = {(p, a) 1a E Q(p)}. We seek (p, 6) such that z(p, a) =0 and
CE@(P). If @ is upper hemi-continuous, then proj, is proper. Furthermore, if
there is any open neighborhood U cS:l such that, when restricted to
U, G(P) = {cP~(P), . . . , V,,(P)) where vi: U +A is a continuous function and n is
 J. Geanakoplos and W. Shafer, Systems of simultaneous equations 71

k
Q(P)

A
Z(P)

Sg
Fig. 1

odd, then proj, is of non-zero degree. To see the significance of the

(I- 1)-manifold hypothesis, consider figs. la, b, c.
In all three diagrams A = R, +, and z has the functional form z(p,a) =
i(p)-UE R, so that the graph of z fits in the same diagram as the graph of @.
Note that z is Walrasian-like. In all three diagrams @ is upper hemi-
continuous and there is an open set U on which @ is a function. In fig. la
Graph @ is not a manifold and there is no solution to z(p, a) = 0 and a E G(p).
In fig. lb, @ satisfies the further property that for each p, G(p) is convex
valued (and N is also a topological manifold). Here there is a solution.
Indeed a familiar argument along the lines of Kakutani’s fixed point theorem
shows that with convexity there must be a solution. In fig. lc, a(p) is not
convex valued. But N = Graph @ is an (I - 1)-manifold and there is a solution.
As we have said, we have in mind one application where @ is the
(aggregate) supply correspondence of the productive sector of an economy
where production is chosen according to some rule, perhaps not profit
maximization, where firms may not have convex technologies.
In another application to financial models of general equilibrium we think
of A as the collection of all J-dimensional subspaces of some Euclidean space
Rs, S>J. Here lRs represents the state contingent money payoff space, and a
subspace of Rs represents the set of attainable payoff vectors. It is well
known that one can find a topology in which A, called the Grassmanian, is a
J(S - J)-dimensional compact manifold. Let u: Syj +Rs xJ be an arbitrary
continuous function denoting the payoff of each of the J assets in each of the
S states of nature. In this application we let Q(p) be the collection of all
subspaces in A that contain all the asset payoff vectors, Q(p) = {u E Ala 2
spun(u(p))}. We will show that v can always be approximated arbitrarily
closely by a function 0”:Syj +RsxJ, such that, letting 6(p) = {UE Ala1
spun(iT(p))} and fl=Graph 6, all three properties above hold. We can
72 .I. Geanakoplos and WYShafer, Systems of simultaneous equations

- -
conclude that there must be some (p, a) with z(p, a) = 0 and ti E &F)), and since
the approximation is arbitrarily close, there must also be a solution to
z(p, a) = 0 and a 1 span (u(p)).
The second way N naturally arises is as the solution to a system of
simultaneous equations. Let f: S’<,! x A’+R’, where we have placed a
superscript Y on A to suggest that in this class of problems we take A to be a
manifold of the same dimension as the range of J Then N =f -r(O).We seek
- -
(p, a) that simultaneously solves z(p, a) = 0 and f(p, 5) = 0. Needless to say, we
cannot solve both systems unless we know that f(p,ti)=O can be solved,
which is to say that there must be a j?~Syj such that &(a) =f(fi, ti) =0 can
be solved for a. Suppose there is a i, such that deg(f6, 0) #O. Then we need
only check that proj,: N = f - ‘(O)+Syj is proper to show that the system
(z, f) has a zero. In applications it will typically be much easier to check that
there is one i, at which fi has non-zero degree than it is to show that (z, f)
has non-zero degree.
There are already two closely related alternatives to Brouwer’s theorem for
demonstrating the existence of a solution to the Walrasian system. In the
path-following approach Smale derived from Hirsch’s mathematical work,
one solves z(p) =;ly for some J. and ye R’, and then follows the solutions as
l-+0. In the homotopy approach, one finds a continuous family of functions
zl: N +I@ such that z0 has a unique solution and zi = z. One then follows the
corresponding solution to z1 =O, beginning where z0 =O, until a solution to
z1 =z =0 is found. Homotopy methods were brought to the attention of
economists primarily by the book of Milnor (1976). Scarf, Eaves, Balasko,
and Smale, among others, have all used path-following or homotopy
techniques for demonstrating existence and/or computing solutions to the
Walrasian system, in lieu of applying Brouwer’s theorem. Of course these
same techniques have been used to prove Brouwer’s theorem directly. But
the important point for us is that the path-following techniques are
potentially more powerful than Brouwer’s fixed point theorem. In this paper
we describe an economic framework more general than the Walrasian system
to which Brouwer’s theorem does not apply, but for which these two
techniques nevertheless guarantee the existence of a solution to the resulting
simultaneous equation system z. Oriented degree theory, or the related tixed
point index theory and the index theory of vector fields, has been used by
Dierker (1972), Balasko (1975), and Smale (1974) in the Walrasian setting,
by, Mas-Cole11 (1977) and Kehoe (1980) in the Walrasian setting with convex
production, and by Kamiya (1988) in the case with non-convex production.
Duflie and Shafer (1985) used Mod 2 degree theory to demonstrate the
existence of equilibrium in the incomplete markets exchange economy setting.
In section 2 we provide a general framework which in principle includes
these examples as special cases, and which we hope will be applicable to
other similar problems. In section 3 we give some applications. In Appendix
 J. Geanakoplos and W. Shafer, Systems of simultaneous equations 73

A we give a second proof of our main theorem based on first principles

(which perhaps could be used as the basis of a computational algorithm).

2. The main result

Let S:-:={(p,,...,p,)~[W’l~~>0; Ci=1pi=l} be the interior of the I-1
simplex, and let 9’:: = {(p,, . . . ,pr) E R’lpi>O and If= 1pf = I}. In the follow-
ing pages we will nearly always use Sc:, but nothing of substance would
need to change if we substituted 9’“:_:. Let A be a topological space. Let
N cST: x A. Suppose that z: S*;: x A+R’. What conditions on z and N
- -
suffice to guarantee the existence (p, a) EN of a solution to z(p, a) = O?
We begin by defining the Walrasian-like hypotheses we need for z to
satisfy:

Definition. The function z: ST: x A+@ is C“-Walrasian-like (C” means

k-times continuously differentiable) on a set N cS:j x A if it satisfies (l)-(3)
below:
(1) A is a Ck-manifold and z is Ck.
(2) Walras Law: If (p, a) E N, then p. z(p, a) = 0.
(3) Boundary: If (p”, a”) E N, and p”+p E dS:j, then
max lim sup zi(pn, a”) > 0.
fi: P,> (l/l)) n

The similarity to the Walrasian system z is of course unmistakable. Note that

Co means continuous, and that continuity alone is sufficient for our existence
theorems. If (1) holds and if (2) holds more generally for (p, a) E Sy: x A, and
if (3) can be strengthened so that (p”, a”) ESP+-+’x A and p”+p~ 8Sy: implies
that Zi(pn,u”)~co for some i with pi=03 then we say that z is strongly
Ck-Walrasian like. We now turn to N.

Definition. N is Ck-regular, if N is a (I- 1)-dimensional Ck-manifold, a

submanifold of S’;: x A if kz 1. N is proper if the map proj,: N-ST: is
proper, i.e., if K c Sy: is compact, then {(p, a) E N Ip E K} is compact.

Definition. (z, A, N) is Ck-admissible if z is Ck-Walrasian-like and N is

Ck-regular and proper.

Remark 1. Suppose that @:S’;j -+ A is a correspondence, and N = Graph @.

Then proj, is proper if and only if Cpis upper hemi-continuous; in particular
if A is compact then proj, is proper if and only if N is closed in S’;: x A.

Example I. An important kind of N arises as the solution to a system of

r-simultaneous equations which depend on r auxiliary variables and the
prices p. Let A be a compact, r-dimensional CL-manifold, and let f: Sy: x
74 J. Geanakoplos and W. Shafer, Systems of simultaneous equations

A+lRe’. Suppose that f is Ck, for k2 1, and f is transverse to zero [i.e. if

f (p,a)=O, then rank Df (p, a) =r], which we write f h 0. Then N = f -'(0) is
an (I- 1)-dimensional, Ck-manifold, and proj,: N +Syj is proper. As we shall
see, in the applications of the theorem we shall present, we will also get the
ontoness of proj, as well. Furthermore, in many applications a specific
knowledge of f guarantees that N is proper even when A is not compact.
Finally, this example can be slightly generalized to the case where there is a
family of Ck-functions jj: T x Ai-, BY, where Ai is open in A and @= 1 Ai = A.
We then require that each fi 4 0, and if a E Ai n Aj, and &,a)=0 for some
p E s:_: then fi(p, a) = 0.

Example 2. Let Yc R’ be a compact set with a smooth boundary dY of

dimension I- 1. To each point YE aY associate the outward pointing normal
vector D(y)tsY’-‘. Then the map $9’:: xdY+R’-’ given by f(p,y)=
[p-D(y)]:-’ is trivially transverse to zero, if D is a smooth function. Let
N=f-‘(0). Moreover, from the fact that max,,,,p.y must have a solution,
proj,(N) =Yy:. When Y is convex, N corresponds to the profit maximizing
choices of the firm. In the general case N corresponds to marginal cost
pricing. Note that in neither case is it necessary that for all peP’P:_j, there be
a unique, or even finite number of choices y in dY with (p, y)~ N. For
example, Y could display constant returns to scale over some bounded range,
and then for some price there would be a continuum of profit maximizing
choices.

We turn to the last property we shall impose on N.

We shall see that degree theory provides not only a powerful tool for
determining existence of equilibria but also for determining index theorems
and generic local uniqueness, giving a deeper insight into the structure of
equilibria. For the reader unfamiliar with the details of degree theory
Appendix B has been provided.
Let N and Y be Co manifolds of the same dimension, and suppose Y is
connected and orientable, and that OE Y. Let i: N+ Y, and suppose that
i-‘(O) is compact. If N is oriented, then the oriented degree of i at 0, written
deg,(i,O), is well defined. If N is not oriented, then the mod 2 degree of i,
written deg,(t,O) is well defined. If deg,(i, 0) #O or deg,(Z,O) #O then
i-‘(O) #@, and this is the basis for degree theory as an existence tool. Degree
theory can also be used as a stability tool. If the degree of i is non-zero,
there is a non-empty compact connected subset K of i-‘(O), which is stable
in the sense that for any open neighborhood U of K, all sufficiently small
perturbations g of i have at least one solution x E U n g- ‘(0). We call such a
set K a stable set of equilibria. If &- ‘(0) is a finite set and i is a local
homeomorphism in a neighborhood of each point in K’(O), then deg,(i,O)
gives the number of points in Z’(O), counted with orientation, which gives a
 .I. Geanakoplos and W. Shafer, Systems of simultaneous equations 75

basis for computing index formulas. In these circumstances, deg,(i,O) counts

the number of points in i-‘(O) mod2, i.e., deg,(i,O)= 1 if #z-‘(O) is odd and
deg,(i,O)=O if #z-‘(O) is even. Since Syj is connected and proj,: N-+Sy:
is proper, the degree of proj, is also well defined and independent of the
point at which it is computed. We write deg,(proj,) or deg,(proj,) for this
degree. It will turn our that for admissible (z, A, N) a sufficient condition for
the existence of a zero of z is that the degree of projl is not zero; for this
reason we turn to some examples of computing the degree of proj,.

Definition. N has the global graph property if there is a function cp:S?j +A

with N =Graphcp={(p,cp(p))Ip~Syj}.

Clearly if N has the global graph property, then deg,(proj,) = 1. In this

case also we can orient N by the homeomorphism @:Sy: +N defined by
G(p) = (p, q(p)), and with this orientation deg,(proj,) = 1.

Definition. N has the local graph property if there is a non-empty open set
U c Syj and a function cp:U +A with N n (U x A) = Graph cp.

In this case we have proj; l(p) c U x A for p E U, so that

But projllc"xA)nN is a local homeomorphism and since deg(proj,)=

deg(proj,, p) for any p E Sy:, this gives either Ideg,(proj,)l = 1 or deg,(proj,) = 1.

Definition. N satisfies the generic graph property if there is an open, dense

subset U c Sy: and a function cp:U + A such that N n (U x A) = Graph cp.

Example 3. Let A be a compact r-dimensional manifold, as in example 1

and let f: ST: x A-R* be transverse to zero and smooth. Let N =f-‘(0).
Then by the transversality theorem, there is an open, dense subset U of Syj
such that for each p E U, N n ({p} x A) is a finite set. We can calculate
deg(proj,)=deg(proj,,p) for any ~EU. Note that deg,(proj,,p) counts the
number of elements in N n ({p} x A) mod 2, while deg,(proj,,p) counts the
same elements with orientation. The generic graph property requires that U
can be chosen so that N n ({p} x A) is a singleton, for all p E U.

E_uample 4. Let A = KY, and suppose that f: ST: x A+R’ is transverse to 0.

Furthermore, suppose that N =f-‘(0) is proper and onto. Finally, suppose
that for any fixed pi ST:, f,,: A = R’ +lKY, given by f,(a) =f(p, a), is atline in
a, i.e., there exists C = C(p) E R’ and B = B(p) E F!” * such that f,(a) = C + Ba.
Then again by the transversality theorem and properness, there is an open,
76 J. Geanakoplos and W. Shafer, Systems of simultaneous equations

dense subset LJcSyj such that for all PE U, N n ({p} x A) is a finite set. But
from the afhneness of f,, it contains exactly one element, or else a continuum
of elements, or it is empty. By the ontoness of N it cannot be empty, so the
generic graph property holds for N.

Example 5.
A is an oriented (I- 1)-manifold, F: A+Sy: is a proper
continuous map, and N = {(p, a): p = F(a)}. Then N is proper, and in this case
F=proj, op, where p:A+N is the homeomorphism defined by p(a)=(F(a),a).
If we give N the oriented manifold structure induced by p, then deg,(p) = 1,
and thus

dego(F)= degdprojddeg(PI= degkpWl).

Remark 2. The hypotheses that N is an (I-1)-dimensional topological

manifold, that proj,: N+Sy: is proper, and that N satisfies the local graph
property imply that the map projj: N-+Sy: is onto.

Remark 3. Since proj,: N-S, IF’+ is onto, we may define the correspondence
@: S’;: --+A by Q(p) s {a E A( (p, a) E N}. The local graph property implies that
there is some open set U c Sy: such that restricted to U, the correspondence
@ is actually a function cp.

Remark 4. Similarly one might define

the correspondence Z: ST: +R’ by
Z(P) = {z(P, a) la E Q(P)}. Th is correspondence is non-empty-valued, and upper
hemi-continuous. Compared to the famous so-called Walras excess-demand
correspondence, the only property that it does not satisfy is
convex-valuedness.

Remark 5. Any non-empty-valued, upper hemi-continuous, convex valued

correspondence can be approximated arbitrarily closely by a continuous
function. Indeed that is how Kakutani’s fixed point theorem is derived from
Brouwer’s fixed point theorem. But it is easy to see that there can be N (or
equivalently Z) satisfying regularity, properness, and the local graph property
that cannot be globally approximated by a continuous function on Sy:.
Consider for example the simple situation depicted in fig. 2.
When 1> 2, N may also have the generic graph property, without being
globally representable, even approximately, by a continuous function.

Notation. Let &={xER”+’ Icixi= b}. Note that HI: is an n-dimensional

hyperplane in R”+ ‘, and that S’;: is an open subset of Hi-‘. fin [w’ will
always denote b=(1/1,1/1,. . . , l/1). We always consider Hi to be the n-
dimensional oriented smooth manifold with atlas {(Hg), (II/,)}, where Gb: Hi+
[w”is defined by
 .I. Geanakoplos and W. Shafer, Systems of simultaneous equations 71

Fig. 2

Sy:, as an open subset of Hi- I, is always given the induced smooth,

oriented manifold structure.
Given a (z, A, N) Ck admissible, 2: N-+H’,- ’ will always denote the Ck
function on N defined by i(p,a)=(p,z,(p, a), . . . ,p,z,(p,a)). Note that i-‘(O) =
z- ‘(0) A N.

We are now ready to state our main theorem.

Theorem 1. Suppose (z, A, N) is Co-admissible. Then:

(1) If N is oriented..
deg,(i, 0) = ( - l)‘- ’ deg,(proj,).
(2) If N is not oriented or even not orientable:
deg#, 0) = degz(proj,).
Corollary 1. Suppose (z, A, N) is CO-admissible. If degz(projJf0 or
deg,(proj,) # 0, then there is a stable set K of solutions to z(p, a) = 0, (p, a) E N.

Corollary 2. Let z: S’,-: x A’-+@ be Co- Walrasian-like, and let f:St+-: x A’+
Iw’ be continuous. Suppose there is at least one POESY: such that if
f$(a) E f (j, a), then deg( fF, 0) is non-zero. Moreover, letting N = f - ‘(O),
suppose proj 1: N + ST: is proper. Then there is a solution (~,a) to the system
of simultaneous equations z(p, a) = 0 and f (p, a) = 0.

Remark 6. If N has the global graph property, then it is homeomorphic to

Sy: and defining z’: S’;: +[w’ by z’(p) =z(p, q(p)) Theorem 1 is reduced to
the standard Walrasian existence problem.
78 J. Geanakoplos and W. Shafer, Systems of simultaneous equations

Lemma 1. Suppose (z, A, N) is Ck-admissible for some k20. Then there is

some open, convex set SL- ’ c SC-:, with non-empty smooth boundary aSL-‘c
SC-:, such that if ~ES’,F:\SE-‘, and (p,a) E N, then .?(~,a) =A(p--b) has no
solution nz 0. In particular, if h: [O, l] x N-+H’,-’ is defined by h(I, (p, a)) =
If(p,a)+(l -A)@-p), then h is Ck and h-‘(O) is compact.

Proof: Suppose (p”,a”)EN and p”-+p~8S~‘. If t(p”,a”)=I”(p”-b) for 220

and n large, then lim sup, Zi(p”,a“) = lim SUP, A”(pl --fiJ 5 0 for all i with pi < fii,
contradicting the boundary condition. So all p with i(p, a) =2(p-$), 2 20
and (p, a) E N for some a can be taken to lie inside some set St-’ satisfying
the conditions of the lemma. Since SL-’ cS~:, proj;‘(SL-‘) is compact by
the properness of projl, and [0, l] xproj;‘(Si-‘)=,h-‘(0) is closed by
continuity, it is compact. 0

Remark 7. The lemma shows that the ‘excess value demand’ map t is
homotopic to the trivial map (p, a)+-p), in such a way that the zeros of
the homotopy remain in a compact set. This trivial map is actually the excess
value demand of a single Cobb-Douglas consumer who ignores a, has
endowment of the 1 goods equal to 16, and utility function u(x,, . . . , xl) = Z7ixi.

Proof of Theorem 1. Define a map 4: S’+Y:+Hb-’ by 4(p) =i, -p. The

derivative of $,,o~o$;’ is just (- 1) times the identity map of [w’-‘, so
deg,($, 0) =( - l)‘- ‘. By the product rule, for the oriented case we have

Define h: [O, l] x N+Hb-’ by h(t,(p,a))=ti(p,a)+(l -t)40proj,(p,a). h is a

homotopy between I and 4 o proj,, and h-‘(O) is compact by Lemma 1. Thus

deg,(i,O) =deg,(4 oproj,,O) =( - l)‘-’ deg,(proj,).

In the non-oriented case, the only difference is that deg,(+,O) = 1, so that we

get desa(% 0) =desz(projl). Cl

Degree theory can be used as a tool for demonstrating the existence of

equilibrium even if z is a correspondence. Moreover, we can dispense entirely
with the boundary condition if we suppose that z is also defined for
(p, a) ES’;’ x A, provided that we modify the definition of equilibrium to
permit goods in excess supply with a price zero. We combine both these
observations in the following corollary to Theorem 1. The idea behind the
corollary is that under suitable condtions on the correspondence Z there
must be a sequence of continuous functions z” satisfying the earlier boundary
 J. Geanakoplos and W. Shafer, Systems of simultaneous equations 19

condition which ever more closely approximate the correspondence Z when

prices are strictly positive.

Corollary 3. Suppose A is metrizable, Z: SC-l x A+2” is a correspondence,

and NcS’-’ + x A such that:

(I) Z is upper hemi-continuous, convex, compact, non-empty valued.

(2) p’ z =0 for all p such that there exists an a E A for which (p, a) E N and
z E Z(P, 4.
(3) N is compact.
(4) (Sy: x A) n N is an (l- 1)-dimensional topological manifold.

Let proj, denote the projection of (Sy: x A) n N into Sy:. Then

- -
deg,(proj,)#O or deg,(proj,) #O implies that there exists a (p,a) EN and a
FEZ&~) such that 250.

Proof. Step I. Suppose Z is single valued, so we can consider Z as a

continuous function. For each positive integer n, define

z”:S:_: x A+@ by ZXP, a)=.Up, 4 + lln(l/lpt- I), i=l )...) 1.

Then (zn, A,(Sy: x A) n N) is Co-admissible, so by Theorem 3 and Corollary

1 there exists (p”, a”) E(S~: x A) n N such that z”(p”, a”) =O. By (3) we can
suppose that (p”, a”) -(p, a) EN. Since we have Zi(p”, a”) = l/n( 1 - l/lpi) for all
n, it follows that Z,(j, ti) = 0 if pi > 0 and Z,(p, 5) 5 0 if pi = 0.

Step 2. We apply Step 1 to approximate selections from Z. Let d be a

metric on ST’ x A, and {qa}as, a partition of unity with compact supports
such that diam(suppq,) <E for all GL.Select (~‘,a’) ~suppq~ and z’~Z(p”, a’)
and define a function

z,:Sy’x A-R’ by z,(p,a)= c qJp,a)(z’-(pz”)u)

LZEI

where v=(l,l,..., l)~@.

Then z, is well defined, continuous, and satisfies p. ze(p, a) = 0 for all (p, a).
- -
By Step 1, there is a (p’,a’)~N such that zE(pE,aE)sO. Let E+O and (p,a) be a
cluster point of {(~‘,a”)}. Using properties (1) and (2) of Z one can readily
verify that {z,(p’,a’)} has a corresponding cluster point Z such that ,550 and
zEZ(p,a) 0.

3. Applications

We now give some examples, applying Theorem 1 to the standard pure

80 J. Geanakoplos and FK Shafer, Systems of simultaneous equations

exchange model, the standard Walrasian model with production, and to the
problem of pseudo-equilibrium in a model with incomplete markets, and to a
model with non-convex production and general pricing rules.

Example 1. Standard pure exchange model

Take N E S’,-j, and any economic model which gives rise to a
Co-Walrasian-like excess demand z: Sy: +R’. (A can be taken to be a one
point set, and hence ignored.) Thus proj,: ST: -S’;: is just the identity map,
so deg,(proj,)= 1. If z is smooth and 0 is a regular value of i, then i
preserves orientation at phi-‘(0) if and only if

If we assume z is the restriction of a homogenous of degree 0 function to

Sy:, then a little exercise in determinates gives

sgndetD(ll/ooioIl/;‘)(x)lZ=J,,,,,=sgndet[Djzi(p)], i, j=l,...,I-1.

Thus we get

(- I)‘-‘=deg,(i,O)= c sgndet[Djzi(p)), i, j= 1,. ..,I-- 1,

PEZ-‘(0)

which is Dierker’s (1972) index formula.

Example 2. Production
We consider a model (Fh, wh,Oh,Y) where Fh: l@++ x R, +I?!+ is agent h’s
demand function, wh his endowment vector, and tlh his share of profits. Y is
the production set. Assume Fh is continuous, homogenous of degree 0,
p. Fh(p, m) = m, and lim,+aq: ,1o)IIFh(p,l)II= +co. Assume whclRr+, ~w~E@++,
and that 1 Bh= 1, ehlO. Finally, suppose Y satisfies (i) is closed and convex;
(ii) Y n l@+= (0) and (iii) Y = Y--l@+. Let A= R’, z:SyJ x R’+lQ’ be defined
by

Z(P,Y) = ch Fhb,max(0,pwh+ Bhpy)) -1h wh- y,

and

N= (p,y)~Sy: xR’:yEargmaxpy’ .
Y’EY

We assert that deg,(i, 0) is well defined and equal to (- l)‘- ‘.

By the usual argument the attainable production set is compact, so we can
 J. Geanakoplos and W Shafer, Systems of simultaneous equations 81

modify Y without affecting i-‘(O), to satisfy: (iv) Y= K - l@+, K compact,

convex. From now on we assume Y satisfies (iv). It is now easy to check that
z is Co-Walrasian-like on N, and that proj,: N-+S’;: is proper. We need to
show that N is an I- 1 manifold, and compute the degree of proji.
The procedure is outlined below:
Step 1. Define N*={(p,y)~Sy’ x IR’:y~argmaxp. y'}. Clearly N is an
open subset of N*. Define u =( 1, 1, . . . , 1)~ R’, and suppose without loss of
generality that u. y < 1 for all y E Y. Define a map 4: N* -*If:- ’ by

dhY)=(l -uY)P+Y.

Let n: [WI+Y be the map which assigns to each z E [w’the point in Y at which
(z - y)(z- y) is at a minimum. Then using the convexity of Y and the
definition of profit maximization, one can show

[This map 4 is a trivial modification of a map in Mas-Cole11 (1985,

Proposition 3.4.2)]. Thus 4 is a homeomorphism. Give N* the (I- l)-
dimensional oriented manifold structure determined by the homeomorphism
$, and N the induced manifold structure obtained as an open subset of N*.
Step 2. We assert deg,(proj,) = 1. This would be easy if N had the local
graph property, i.e., if the ‘supply function’ were single valued on an open
subset of prices, but this is probably not true in general under our
assumptions. Instead we proceed by a homotopy argument. Let proj,: N*-+
S’;’ c Hi- 1 be the projection on N*. Note that for any FE S’;:, proj; ‘(p) c N,
so that deg,(proj,,p) =deg,(proj, (,+P) =deg,(proj, IN), for any PEST.,!. We
now compute deg,(proj,,p). Define h: N* x [0, l] +H:- ’ by h(p, y, t) =
tproj,(p, y) +( 1 -t)+(p, y).Clearly h is a homotopy between proj, and, 4 and
we leave it to the reader to show that h-‘(p) is compact for any PEST:.
Thus deg,(projl, p) = degO(+, p) = 1, so we get deg,(t, 0) = ( - l)‘- ‘. Computing
a useful index formula requires more structure on Y and more work; see
Kehoe (1982) Mas-Cole11 (1985).

Example 3: Existence of equilibrium for asset economies

Let us take A = G,(l@), the smooth compact J(S -.J)-dimensional manifold
of all J-dimensional subspaces of Rs. It is well known that A can be written
as the finite union of sets A= IJ A,, where each A, is homeomorphic to
RJ’s-J’, as follows. Let
82 J. Geanakoplos and 19: Shafer, Systems of simultaneous equations

be an S x J matrix, where G, is the J x J identity matrix I and G, is an

arbitrary (S-J) x J matrix. The columns of such a matrix G span a J-
dimensional subspace of Rs. Permuting the rows of G according to some
permutation (T of S elements gives another matrix G” whose columns also
span a J-dimensional subspace. Any a E A can be represented by G” for some
G and some permutation 0.
Let z: Sy,! x GJ(RS)+R’ be Co Walrasian on ST: x GJ(Rs). We take z to
be the excess demand in an economy where trade depends on prices p E Sy,!
and the ‘potential subspace of trade’ a E A = GJ(Rs). We are also given an
exogenous asset return matrix u: ST: -+ Rs ’ J. Equilibrium is a (0, a) E Sy: x A
- -
such that z(p,a)=O and ti=span(v(p)). The difficulty in proving the
existence of equilibrium arises because the column span of the matrix u(p)
need not be fully J-dimensional and can vary with p, As a result it is
necessary to introduce the notion of a psuedo equilibrium (fi,h) ES:: x A
satisfying z@, 6) = 0 and 6 3 span (v(i)). Duffie and Shafer (1985) proved that
pseudo-equilibrium always exists, and that generically all pseudo-equilibria
are equilibria. In papers in this volume Husseini, Lasry and Magi11 (1990)
and Hirsch, Magi11 and Mas-Cole11 (1990) give alternative proofs of the
existence of pseudo-equilibria. Here we use our method to give a brief proof
of both the existence of pseudo-equilibria and the generic existence of
equilibria. We state both theorems, then prove them.

Theorem (Existence of pseudo-equilibria for asset economies). Let z: Sy: x

G,( Rs)+R’ be strongly Co Walrasian-like. Let v: Sy: --+R’ ’ J be continuous.
Then there exists a (p,a)~Sy: x GJ(Rs) such that z&a)=0 and
d3span (u(p)).

Theorem (Generic existence and local uniqueness of equilibria). Let E and M

be smooth manifolds (‘parameter’ spaces). Let i: Sy: x G,(lR’) x E+H’,-’ and
v:S:_: x M+RSXJ be smooth. Suppose that t is obtained from a strongly
Walrasian-like z by &i(p,a, e) =pizi(p, a, e). Finally suppose that for all
(p, a, e, m), rank D,i = I- 1 and rank D,v = S x J. Then for almost every
(e, m) E E x M (that is, except for a subset of measure 0), there are odd number
- -
of solutions (p, a) EST: x G,( Rs) to z(p, a, e) = 0 and a = span (u(p, m)).

Proof of both Theorems. It is convenient to begin, as in the second

proposition, by assuming that i and v are smooth, and then to derive the
first proposition by the approximation of continuous functions by smooth
functions.
 J. Geanakoplos and W. Shafer, Systems of simultaneous equations 83

Recall that we can write A E GJ(rWs)= U A,. Let D,=ST: x A, x E x M.

Let d = (p, a, e, m), and if d E D,, we will also write d = (p, GZ, e, m), where

and G” generates a. Define

f,: DO-+[WJ(S-J) by f,(p,Gz,e,m)=f,(d)=u;(d)-G,oT(d)

where u”(d) is the matrix obtained from u(d) by permuting the rows
according to 0-r and

with 07 a J x J matrix and u; a (S -.l) x J matrix. Note that f,(d) =

f,(p, G,,e,m)=O if and only if the columns of u”(d) =[&]u~(d), that is, if and
only if the columns of vu are spanned by the columns of [&J. Therefore for
a E A,, a I span (u(d)) if and only if f,(p, G2, e, m) = 0.
For any fixed (e, m) E E x M, let
N o,Ce,mj={(p,a)~S?! x A,\a~span<O,m))} cS*;! xA

and let NC,,,,= UJ&,.,,. Suppose that the hypotheses of the second
theorem above are satisfied. Then by perturbing m we can perturb vz
however we want, without affecting G2 or 07. Hence f, +O. By the
Transversality Theorem, for generic (e, m), N,,(,,,) = f,te, ,,(O) is a (1- l)-
dimensional manifold. Next observe that if a E A, n A,,, then f,(p, a, e, m) = 0
if and only if f,(p, a, e, m) =O. Hence for generic (e, m) E E x M, NC,,,) is an
(I - 1)-dimensional manifold.
Furthermore, since NC,,,,) is closed in S’;: x A and A is compact,
PM,: Nce,,,-SfL: is proper. To show that deg,(proj,)#O it suffices to
observe that for any pi S’;:, v(p,m) is included in some subspace a~ A.
Hence proj, is onto. By the Transversality Theorem, since NC,,,, and Sy:
have the same dimension l- 1 and proj, is proper, there is an open dense set
U c SrJ: on which proj; 1 is finite valued (and non-empty valued by the
ontoness of proj,). But if there is more than one subspace UE A containing all
the columns of u(p,m), then there must be infinitely many such a. (See
Example 4 in section 2). Hence projl is one-to-one on the open set U, so the
mod 2 degree of proj, is non-zero.
Thus for generic (e, m) E E x M, the hypothesis of Theorem 1 are satisfied.
We conclude that if z and v are smooth, then for almost all (e, m) E E x M, we
can find (p, a) with z(p, a, e) = 0 and a 2 span (u(p, m)). But now by passing to
sequences (e”, m”)-+(e,m), a similar conclusion must hold for all (e,m).
84 J. Geanakoplos and W. Shafer, Systems of simultaneous equations

Furthermore, for any continuous z*: ST: x GJ([WS)-+W’ and continuous

o*: s:_: +lRSXJ we can always approximate z* and v* by smooth z and v.
Moreover, we can always take E to be a bounded open set containing the
origin in Hl-1 SXJ
z”i(P, 4 4 = Z.(P, a) +

(ei/Pi) {min 1 sjjl ij} an?&, $f~v~P) +‘m aas”~xte~~~~ of z and v satisfying
the hypotheses of the second theorem. Passing to the limit (e”,m”)-+(O,O)
yields the theorem on the universal existence of pseudo-equilibria.
To prove the generic existence of genuine equilibria, we shall show that
for generic (e, m) E E x M, there is no (p, 5) satisfying i(p, ti, e) =O,
tin span(v(p, m)) and rank v;(p, m) <J. It will follow that v(p, m) has full
rank, hence there is a unique a~ A with a~span(v(p,m)), hence all the
pseudo-equilibria above are genuine equilibria.
Let YJel as before be the (J- 1)-dimensional sphere. Extend E and f, to
D, x YJ- ’ by ignoring the last coordinate. But now consider a new set of J
equations Y: D, x YJ-r + RJ given by Y,(p, a, e, m, x) = v;(p, m)x. Then given
(p, a, e, m), and so given vy(p, m), there is a x E yJ solving Yv,(p,a, e, m, x) = 0 if
and only if vT(p,m) does not have full rank J. But now consider the system
(i,f,, Y,): D, x 9J-1+HbP1 x F8J’s-J’ x IwJ. Remember that rank D,i=l- 1
and that rank D,v = S x J. The latter assumption allows us to control vy and
v; independently, so that we have rank D,(f,, Y,) =.l(S-J) +J as well as
rank D,i = I- 1. Thus (5, f,, YJ It\ 0. By the Transversality Theorem, for
generic (e,m), (i,f,, Y,):Sy: x A, x 9J-1+Hb-’ x [wJ’s-J’ x IwJ is t,ansverse
to 0. But this is only possible, given the dimension of the domain and range,
if (i, f,, YO)-l(0) is empty. Applying this argument to each u finishes the proof.

Example 4. Increasing returns and general pricing rules

In this section we investigate a model with a non-convex production set
and general pricing rules. This model is a very special case of the model in
Bonnisseau and Cornet (1989); the novelty here will be the computation of
deg,(i,O), which surprisingly turns out to be independent (given our method
of orienting N) of the pricing rule itself. This allows the computation of an
index formula in the smooth case, but we have not carried out this
calculation. Kamiya (1988) has recently analyzed a much more general model
using similar techniques from degree theory.
We consider an economy E =(F, E: f), with the following interpretation: Y
is the production set. We assume Y contains any initial endowment of goods:
for example, one could take Y= Y’+{w}, where ~20 is the intial endow-
ment vector and Y’ satisfies the usual assumption Y’ n R: = (0). p=f(y) is
the pricing rule. For example, f(y) could be a realization of average cost
pricing, a selection from the set of break-even price vectors for y. If dY is
smooth, f could be marginal cost pricing (see Example 2, section 2). F(p, y)
represents aggregate demand at prices y and production vector y. We assume
any income redistribution scheme is embodied in F.
 .I. Geanakoplos and W. Shafer, Systems ofsimultaneousequations 85

We make the following assumptions: (1) Y c l!? satisfies (i) Y n I?+ + #8;
(ii) {yz w> n Y is compact VWE@ and (iii) Y = Y-R’+. (2) Define YE=
(YE Y:~Y’E Y such that y’>>y}. Then J: Y,-+S+‘- 1 is continuous and satisfies
yf(y)>OvyEY,nR:. (3) F:R$+xR[W: is continuous and satisfies (i)
pF(p,y)=py for all (p,y) such that py>O; (ii) If p”--+p~S!$ and py>O, then
((F(p”%Y)((+ + a.
The basic idea is as follows. Define (z, A, N) by

A= R’.

4P7Y) = F(P,Y) -Y
N={(P,Y)&: x Y,:P=~(Y)).
A basic difficulty is that N need not be proper and z may not be
Co-Walrasian, so that Theorem 1 does not apply directly to (z, A, N). What
we will do is replace (z, A, N) with a model (z, A, N’), where N’ is obtained
from a new Y’ and f’, such that (z, A, N’) satisfies the hypotheses of
Theorem 3 and the changes made to Y and f have no effect on i-‘(O). This
will allow us to show

Proposition. There is a choice oforientation of N such that

deg,(i,O)=(-l)‘-‘.

Proof of Proposition. For any EER, let V(E)={yER’:yi~EVi}. For E>O,

define Y’ = [Y n V( -E)] - lR’+. Given the assumptions on Y and f, it is
possible to find a E>O and an f’: Yk+Sy ’ such that
(i) Ybn V(-E)= Y,n V(-E),
(ii) Ic’(y)-f(y)VyE YEn V( -e/2),
(iii) if YE Yk and yis -E, then f!(y)=O,
(iv) 3~>0 such that yf’(y)zr, VYE Yk.
Note that if z(p, y) =0 and (p, y) E N, then necessarily YE R$, so that
replacing Y and f by Y’ and f’ can have no effect on the equilibria, nor
any effect on i in a neighborhood of the equilibria.
We first show that N’ is CO-regular and proper. Define 4: YL+H:-’ by

4(y)=y+(T~,, where u=(l,l,..., l)eIW’.

4 assigns to each y E Yk the unique vector 4(y) E H\- ’ in the direction v from
y. It is not difficult to check, given the properties of Yk, that I#I is a homeo-
morphism of Yh onto Hi-‘. We give YL the oriented manifold structure
86 J. Geanakoplos and W. Shafer, Systems of simultaneous equations

induced by this homeomorphism, so that &g,(4)= 1. N’ = {(p,y)~Sy: x

Y;:p=f’(y)}. N’ is an open subset of GraphPi( and the latter can be
made an oriented (I- l)-manifold via the homeomorphism p: Yk+Graph-‘(f’)
detined by p(y)=(f’(y), y). Note that this makes p an orientation preserving
homeomorphism, so that deg,(p)= 1. We give N’ the oriented manifold
structure induced as an open subset of Graph- ‘(S’). If K cS:J is compact,
then proj; l(K) cK x [V( -E) n YE], so it is bounded. It is closed by conti-
nuity. Hence N’ is proper.
It is easy to check that a is Co-Walrasian on N’, given the assumptions on
F and the properties off’.
It remains to compute the degree of proj’: N’+Sy:. Note that for any
FE Sy: there is by continuity an open neighborhood U of f”- ‘j(p) such
that f’(U)cST:. Thus on U, fl=projl op, so that deg,(f’,p)=
deg,(proj,, p) &g,(p). Since deg,(p) = 1 and deg,(proj,, jj) = deg,(proj,), we need
only show that deg,(f’,p) = 1. We do this by a homotopy argument. Define
h: Y; x [O, l]-+N:~ ’ by

Clearly h is a homotopy between f’ and 4. We assert that for any PES’J:,

h- ‘(~7) is compact. hp l(p) is closed by continuity, so we need only show that
h-‘(p) is bounded. We have

(y,O~h-l(P)-=rf’(y)+(l-t)L-Y+((l-rY)lUul=P
(Y? 4 E r, x co, 11.

We assert that (y,t)~h-‘(p)=>y~ V(-E-(l-l)), so that

h-‘(p)c[Y;n I’-E-(I-l))]x[O,l],

a bounded set. The details are left to the reader. Then we have degO(f’,P)=
deg,(A P) = degA4) = 1.

Appendix A: Elementary proof

Our main Theorem 1 relied for its proof on degree theory. Here we give
an elementary proof of a weaker theorem which can also be used as the basis
of a computational procedure to find a zero (i.e., an equilibrium). Note that
the following theorem would have sufficed for the application we gave to
tinancial asset general equilibrium.

Theorem I’. Let z:S:-: x A+@ and let N c S’F: x A. Zf (z, A, N) is

 .I. Geanakoplos and W. Shafer, Systems of simultaneous equations 87

C’-admissible and N satisfies the generic graph property, then there exists
(p, a) EN such that z(p, a) = 0.

Proof of Theorem I’. Step 1. Without loss of generality, we may replace i

with Z satisfying Z(p, a) = p -p if p E ask- ‘,
Take Sf,‘, an open, convex body with smooth, non-empty boundary aS$’
such that S*-‘1S’-‘~S’-‘~~‘-‘~S~-‘.
+ + - E/2 - E/2 - E Let d:Sy:+[O,l] be a smooth
function such that d(p) =0 if PES~:\S$~ and d(p)= 1 if PEG-,-‘. Such a
function exists by standard arguments. Then let Z: N-+H’,-’ be defined by
f(p,a)=d(p)i(p,a)+(l -d(p))(p-p). Note that F(p,a)=O for (p,a)~ N only if
i(p, a) = 0. Now make the change of variables s-+2& and the claim of Step 1 is
established.

Step 2. We may assume that there is an open set U cS:j and a function
cp:U+A such that (UxA)nN=Graphcp, UnaSL-l#$!J and if
(p, a) 6 [(U n B- ‘) x A] n N and (p’, a’) E(aSL-l x A) n N and (p’, a’) #(p, a)
then

0, a) - ‘, ’
IF(p, a)/ + H.

From the generic graph property, there is an open dense set UCS~: such
that (U x A) n N = Graph cp, where cp is a function cp:iJ+A. Since we have
great freedom in choosing dS:-’ (anywhere in S’-‘\S&‘) we may assume
UnaSL-l#O. Now take (p,a)E[(UnaS~~‘)xA]nN. Then ,%(p,a)=p-p. If
(p’, a’) E (as:- 1 x A) and ?(p’, a’) z (p - p’) = L(p - p), then p’ = p (since the ray
from j through p can only interest 8-l in one place because we took SE-’
convex). But if (p’, a’) is also in N, then by the graph property at p=p’,
a’ = a = q(p), and (p, a) = (p’, a’).

Step 3. The path-following analogue of Hirsch’s argument shows that there

is a (fi, a) E N with ?((a,ti) =O.
Suppose there is no (&a) EN with Z(p, a) =O. Then we can replace
EN+Hb-’ by G:N+z defined by G(p,a)=5(p,a)/lF(p,a)l, where 2 is the
1-2 sphere in Hb-‘. Furthermore let us denote by H: [(U n 8-‘) x A] n
N-1 the fu r th er restriction of G, so if (p,a) is in the domain of H, then
H(p,a)=G(p,a). Note that the domain of G is a smooth (I- l)-dimensional
manifold, and the domain of H is a smooth (I-2)-dimensional manifold.
Furthermore, since every ray from 6 intersects SL-’ somewhere, the range of
H contains an open set R in c.
By applying Sard’s theorem twice, we deduce that there must be some
element y~Rcx such that both G+ y and H $I y. Hence G-‘(y) is a
non-empty one-dimensional manifold. Furthermore, from the preceding Step
88 J. Geanakoplos and W. Shafer, Systems of simultaneous equations

Fig. 3

2 we know that H-‘(y) is a single point (~*,a*). In fact, Step 2 implies that
G-‘(y) n [(as:-’ x A) r\ N] is also the single point (~*,a*). Moreover, since
H cj~y, G- ‘(y) intersects domain H = [(U n c%- ‘) x A) n N] transversely.
Consequently G-‘(y) n [(Si-’ x A) n N] #O.
Now, by properness, L-G- ‘(y) n cl[($ ’ x A) n N] is a compact set
(where the closure is taken in N). By following along the path G-‘(y) in
cl[($ ‘) x A) n N] starting from (~*,a*) we must come either to an end,
contradicting the fact that G-‘(y) is a one-dimensional manifold, or else
come to another point of intersection of

Gp’(y)na((f?-’ xA)nN)=Gp’(y)n((%-’ xA)nN)

contradicting Step 2.

Remark 7. The conditions we have imposed on N are precisely those few

properties of S’;: used by Hirsch and Smale in proving that a smooth
Walrasian-like excess value demand i: Sy,!-+Hb-’ has a zero. The assump-
tion that N has dimension 1- 1 guarantees that the set L of @,a) EN such
that i(p, a)//@, a)) IS a given vector is typically a one-dimensional manifold.
The properness assumption guarantees that L n (SE- ’ x A) n N is compact.
The generic graph property guarantees that typically L intersects
(as::-l x A) n N in exactly one point. Fig. 3 illustrates the argument when
 J. Geanakoplos and W Shafer, Systems of simultaneous equations 89

N = S’;:. Note that since S*;: is contained in the translation of Hb- ’ by 8,

we can easily imagine the domain and range of i in the same diagram.
The contradiction to the maintained hypothesis that I is never zero is seen
in the above diagram in the fact that the manifold L crosses itself at p*. This
is inevitable since once L gets inside SE-’ it cannot escape through any other
boundary point p E 8-l because 6-p points in the direction i)-p* only
when p=p*.

Remark 8. It is clear that the local graph property is only relevant for
p =p*, where L crosses the boundary of S,‘-I . In fact if there were locally an
odd number of UE A with (p*, a) E N, the same proof would apply. Once L
‘enters’ SL- ’ through one point (p*,a)~ N, it must leave through another.
Pairing up points, we see there is one (~*,a) left over through which L enters
SL- ‘, but cannot leave Sf- ’ without crossing itself. Now it can easily be
shown from degree arguments introduced in section 4, that if N satisfies the
local graph property, there is an open dense set U cS:i such that for each
p E U, proj; ‘(p) consists of an odd number of points. In particular we can
always choose p* E U n as,1-1 . This is one indication that by using degree
theory we can greatly strengthen this theorem.

Appendix B: Degree theory

We give here a very brief review of the basic facts of degree theory. An
excellent reference is Dold (1980); see also Hirsch (1976) for the case of
smooth manifolds.
An n-manifold is a Hausdorff topological space X which has an open
cover 1KLA such that for each 1xthere exists a homeomorphism 4a: W,-+
[w”. n is called the dimension of X, each {W,, @,} is called a chart, and
{V7r~Jas.4 is called an atlas. If all the ‘coordinate changes’ 4,o
& ‘: 4*( W, n Wf)+c$,( W, n We), a, 2~ A are smooth (Cm), the atlas is called
smooth. If all these coordinate changes (which are homeomorphisms)
preserve orientation, then the atlas is called oriented. A manifold with a
countable base for the open sets is called smoothable if it has a smooth atlas.
Such a manifold, together with a given smooth atlas, is called a smooth
manifold. A manifold which has an oriented atlas is called orientable. An
orientable manifold together with an oriented atlas is called an oriented
manifold. The properties of being a manifold, dimension, smoothability and
orientability are topological invariants. An open set C in a n-manifold
(smooth) (oriented) X becomes an n-manifold (smooth) (oriented) in a
natural way.
Given a pair of manifolds X and Y of the same dimension, a continuous
map f: X+Y, and a point YE Y such that f-‘(y) is compact, degree theory
can be thought of as a way of ‘counting’ the number of points in f-‘(y).
90 J. Geanakoplos and W. Shafer, Systems of simultaneous equations

Define

C,= {(f, X, Y y): (i) X and Y are oriented manifolds of the same
dimension;
(ii) f: X+ Y is continuous;
(iii) YE Y and f-‘(y) is compact};
and
C, = {(f, X, Y y): (i) X and Y are manifolds of the same dimension;
(ii) f: X+ Y is continuous;
(iii) ye Y and f - r(y) is compact).

Let Z and Zz denote the rings of integers and integers modulo 2

respectively. We will describe properties of maps deg,: Ce+Z and deg,: CL+
Zz, called respectively the ‘oriented degree’ and the ‘mod2 degree’. We can
do this simultaneously: Let (C, R, deg) denote either (C,,Z,deg,) or
( C2, Z2, deg,). We write deg (f, y) instead of deg (J X, Y y) whenever X and Y
are obvious from the context. Then the basic result is [see Dold (1980)]:

Degree Theorem. There exists a map deg: C+R satisfying:

(D.Z) (normalization): deg(id, Y, Y y) = 1.

(0.2) (localization): Zf(f,X, Y~)E C, Xx Uxf-l(y), Y 1 V~f(u), U open in
X, V open in Y, then:

deg (.A X, Y Y)= deg (flu, u, V,Y).

(0.3) (additiuity): If (LX, Y,y) EC and {G,}y=I is a finite partition of X into
open sets such that (fIGi, Gi, Y y) E C V’i,then:

deg(f,X, KY)= 5 &(f(,,,Gi, KY).

i=l

(0.4) (homotopy invariance): Zf (f, X, Y, y), (g, X, Y, y) EC and there is a homo-

topy h: X x [0,l]+Y between f and g such that h-‘(y) is compact, then:

deg (f, Y)= de (8, Y).

(D.5) (continuity): If (f, X, Y,~)E C and Kc Y is a compact connected set
containing j such that f-‘(K) is compact, then:

deg (.A Y) = de (.A3, VYEK.

(0.6) (product rule): If (f, X, Y$y), (g, Y, Z,z) E C, Y is connected and f is

proper, then:

deg (g 0 L z) = deg (g, z) deg (f, Y).

(0.7) (non-trioiality): Zf(f, X, Y, y) E C, then
 J. Geanakoplos and W. Shafer, Systems of simultaneous equations 91

deg(.f,y)#O implies f-‘(y)#@

Remark I. D.5 implies that if (f, X, Y J) E C, Y is connected and f is proper,

then (since Y is locally compact and locally connected) deg(f, y)=degf, j)
for all yo Y This common value is denoted deg(f, X, Y) or deg(f), and
is called the degree of J

Remark 2. If (f, X, Y y) E C2 and S is a homeomorphism, then deg,(f, y) = 1.

If (f,X, Y, y) E C, and f is homeomorphism, then deg,(f,y)= 1 if f preserves
orientation at f-‘(y) and deg,(f, y) = - 1 if f reserves orientation. f
preserves orientation at f-‘(y) if there is a chart { W, C#J}from the maximal
oriented atlas on X and a chart {V,+} from the maximal oriented atlas on Y
such that f-‘(y) E W, YE V, and f(W)c V, so that the local homeomorphism
II/ofo$-‘: & W)+F? preserves orientation at f$(f-l(y)). If I//of of$-’ is
smooth, then it preserves orientation at &f-‘(y)) if sgndetD$ ofo
~~l(z)l;=g(/-l(y,,=l.

Remark 3. Suppose (f, X, Y, y)E C, f-‘(y) = {xl,. . . ,x,}, m< 00, and there
are disjoint neighborhoods K of xi, i= 1,. . . , m, such that each flw, is a local
homeomorphism. Then by D.2 and D.3,

deg(f,X, KY)= f deg(flwi,W,f(%)yY).

i=l

From Remark 2 above, in the mod 2 case deg,(f(,,, Fl$ f(F), y)= 1, so
deg,(f, y) = #f-‘(y) mod2. In the oriented case, deg,(fl,,, y) = 1 if f pre-
serves orientation at xi and - 1 if f reserves orientation at xi, so that
deg,(f,y) counts the number of points in f-‘(y) with orientation.

Remark 4. By Sard’s theorem, the situation described in Remark 3 is

‘typical’ if X, Y are smooth and S is smooth [assuming f-‘(y) is always
compact]. However, there are continuous maps g: X+Y between compact,
smoothable connected manifolds of the same dimension such that g-‘(y) is
an infinite set for every y E Y If (g, X, Y y) E C and X and Y are smoothable,
however, there is always a (f, X, Y y) E C such that f and g are homotopic at
y (in the sense of D.4), f is ‘close’ to g, and the situation described in
Remark 3 holds for (f, X, Y y).[See Hirsch (1976) for an extensive analysis of
approximation by smooth maps.]

Remark 5. Combining D.4 and D.7, we see that if (J X, Y y) E C and

deg(f,y)#O, then for any g:X+Y homotopic to f in the sense of D.4,
g-. l(y) ~8. This is important because all sufficiently ‘small’ perturbations of f
92 J. Geanakoplos and W. Shafer, Systems of simultaneous equations

are indeed homotopic to f in the sense of D.4. For example, let f:X+IW’,
f - ‘(0) compact, and suppose X is the union of an increasing sequence of
compact sets, X= uF= 1 K,. Suppose g:X+Iw’, and for any sequence x, EX\
K”, If(&)-&“)I 5jf(x,)( for n large. Then g is homotopic to ,f in the
sense of D.4, since for the homotopy given by h(x, t) = tf(x) +(I - t)g(x),
K’(0) is compact.

Remark 6. Let (.f, X, Y, y) E C. We call a non-empty subset K of f-'(y)

stable if for any open neighborhood U of K, there is a smaller open
neighborhood G of K, Ux GI K, such that (fjc, G, K~)E C and
deg(f),, G, x y) #O. By Remark 5, it follows that if K is a stable set of
equilibria, then for any neighborhood U of K, a sufficiently small pertur-
bation g of f will have solutions in U.
We assert that if deg(f,X, xy)#O, then there is a stable subset K of
f-‘(y) which is compact and connected. If f-‘(y) has only a finite number
of connected components, then this is a trivial consequence of D.3. Other-
wise, it can be shown as follows. The collection of all compact stable subsets
of f-‘(y) is non-empty [since f-‘(y) is one of them by D.21, and it can be
partially ordered by inclusion. Any chain of compact stable sets as a lower
bound; one can readily verify that the intersection of nested compact stable
sets is a compact stable set. By Zorn’s lemma there is a minimal compact
stable set K. If K were not connected, then it could not be minimal by
axiom D.3.

Arrow, K. and G. Debreu, 1954, Existence of equilibrium for a competitive economy,

Econometrica 22, 265-290.
Balasko, Y., 1975, Some results on uniqueness and stability of equilibrium in general equilibrium
theory, Journal of Mathematical Economics 2, no. 2, 95-l 18.
Bonnisseau, J.M. and B. Cornet, 1988, Existence of equilibrium when firms follow bounded
losses pricing rules, Journal of Mathematical Economics 17, 119-148.
Debreu, G., 1970, Economies with a finite set of equilibria, Econometrica 38, no. 3, 387-392.
Debreu, G., 1982, Existence of competitive equilibria, in: K.T. Arrow and M. Intriligator, eds.,
Handbook of mathematical economics (North-Holland, Amsterdam) ch. 14.
Dierker, E., 1972, Two remarks on the number of equilibria of an economy, Econometrica 40,
no. $951-953.
Dierker, E., 1974, Topological methods in Walrasian economies, Lecture Notes on Economics
and Mathematical Sciences 92 (Springer-Verlag, Berlin).
Dold, A., 1980, Lectures on algebraic topology, 2nd ed. (Springer-Verlag, Berlin).
Dufhe, D. and W. Shafer, 1985, Equilibrium in incomplete markets: I. A basic model of generic
existence, Journal of Mathematical Economics 14, no. 3, 285-300.
Hirsch, M., 1963, A proof of the nonretractability of a cell onto its boundary, Proceedings of the
American Mathematical Society 14, 364-365.
Hirsch, M., 1976, Differential topology (Springer-Verlag, Berlin).
Hirsch, M.D., M. Magill and A. Mas-Colell, 1990, A geometric approach to a class of
equilibrium existence theorems, Journal of Mathematical Economics 19, this issue.
Husseini, S.Y., J.-M. Lasry and M. Magill, 1990, Existence of equilibrium with incomplete
markets. Journal of Mathematical Economics 19, this issue.
 J. Geanakoplos and W. Shafer, Systems of simultaneous equations 93

Kamiya, K., 1988, Existence and uniqueness of equilibria with increasing returns, Journal of
Mathematical Economics 17, 1499178.
Kehoe, T., 1980, An index theorem for general equilibrium models with production, Econometrica
48, no. 5, 1211-1232.
Kehoe, T., 1982, Regular production economies, Journal of Mathematical Economics 10, nos.
213, 147-176.
Mas-Colell, A., 1985, The theory of general economic equilibrium: A differentiable approach,
Economic Society Publication no. 9 (Cambridge University Press).
Mas-Colell, A., 1986, An introduction to the differentiable approach in the theory of economic
equilibrium, Studies in mathematical economics, in. S. Reiter. ed., The Mathematical
Association of America.
McKenzie, L., 1954, On equilibrium in Graham’s model of world trade and other competitive
systems, Econometrica 22, 147-161.
Milnor, J., 1976, Topology from the differentiable viewpoint (University of Virginia Press,
Charlottesville, VA).
Smale, S., 1974, Global analysis and economics IIA: Extension of a theorem of Debreu, Journal
of Mathematical Economics 1, no. I, I-14.
Smale, S., 1976, A convergent process of price adjustment and global Newton methods, Journal
of Mathematical Economics 3, no. 2, 107-120.
Uzawa, 1962, Competitive equilibrium and fixed points theorems II: Walras’ existence theorem
and Brouwer fixed point theorem, Economic Studies Quarterly 12, 59-62.