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Existence of an equilibrium with limited participation

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  • Kim Weston
Abstract
A limited participation economy models the real-world phenomenon that some economic agents have access to more of the financial market than others. We prove the global existence of a Radner equilibrium with limited participation, where the agents have exponential preferences and derive utility from both running consumption and terminal wealth. Our analysis centers around the existence and uniqueness of a solution to a coupled system of quadratic backward stochastic differential equations (BSDEs). We prove that the BSDE system has a unique $\mathcal{S}^\infty\times\text{bmo}$ solution. We define a candidate equilibrium in terms of the BSDE solution and prove through a verification argument that the candidate is a Radner equilibrium with limited participation. This work generalizes the model of Basak and Cuoco (1998) to allow for a stock with a general dividend stream and agents with exponential preferences. We also provide an explicit example.

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  • Kim Weston, 2022. "Existence of an equilibrium with limited participation," Papers 2206.12399, arXiv.org.
    • Handle: RePEc:arx:papers:2206.12399
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    References listed on IDEAS

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