A new characterization of the efficiency of equilibrium with incomplete markets (Q908834)

This paper provides a new characterization (in the sense of the fundamental theorem of welfare economics) of Radner equilibrium allocations in terms of a concept of efficiency, called \({\mathcal D}\)- efficiency, which generalizes Grossman's social Nash optimality and also containing Host's complete market structure as a special case. It is shown that Radner equilibrium trade plan allocations are \({\mathcal D}\)-efficient for some partition of the set \({\mathcal D}\) of data-event pairs which depends on the market structure and the equilibrium prices, and that under certain conditions any \({\mathcal D}\)-efficient trade plan can be decentralized as a Radner equilibrium with lump-sum transfers. Also a sufficient condition is obtained for Radner's equilibrium trade plan to be Pareto efficient.