BFS 2002

Contributed Talk

A Central-Planning Approach to Dynamic Incomplete-Market Equilibrium

Pascal Maenhout, Bernard Dumas

We show that a central planner with two selves, or two "pseudo welfare functions", are sufficient to deliver the market equilibrium that prevails among any (finite) number of heterogeneous individual agents acting competitively in an incomplete financial market. Furthermore, we are able to exhibit a recursive formulation of the two-central planner problem. In that formulation, every aspect of the economy can be derived one step at a time, by a process of backward induction as in dynamic programming.