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  3. American Economic Review
  4. January 2017
  5. Coarse Competitive Equilibrium and Extreme Prices

Coarse Competitive Equilibrium and Extreme Prices

  • Faruk Gul
  • Wolfgang Pesendorfer
  • Tomasz Strzalecki
American Economic Review
vol. 107, no. 1, January 2017
(pp. 109-37)
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Abstract

We introduce a notion of coarse competitive equilibrium, to study agents' inability to tailor their consumption to prices. Our goal is to incorporate limited cognitive ability (in particular limited attention, memory, and complexity) into the analysis of competitive equilibrium. Compared to standard competitive equilibrium, our concept yields more extreme prices and, when all agents have the same endowment, riskier allocations. We provide a tractable model suitable for general equilibrium analysis as well as asset pricing.

Citation

Gul, Faruk, Wolfgang Pesendorfer, and Tomasz Strzalecki. 2017. "Coarse Competitive Equilibrium and Extreme Prices." American Economic Review, 107 (1): 109-37. DOI: 10.1257/aer.20141287

Additional Materials

JEL Classification

  • D11 Consumer Economics: Theory
  • D51 Exchange and Production Economies
  • D15 Intertemporal Household Choice; Life Cycle Models and Saving
  • G10 General Financial Markets: General (includes Measurement and Data)