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 et al. (Econ Theory 18, 321-332, 2001) that if we allow for free disposal in the market clearing (feasibility) constraints then an irreducible 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 incentive compatible and contracts may not be enforceable (see e.g. Glycopantis et al. in Econ Theory 21, 495-526, 2002). This is the main motivation for considering equilibrium solutions with exact feasibility. We first prove that the results in Einy et al. (Econ Theory 18, 321-332, 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 (Econometrica 62, 881-900, 1994) and we prove that every Pareto optimal exact feasible allocation is incentive compatible, implying that contracts of competitive or core allocations are enforceable.