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Computing Equilibria when Asset Markets are Incomplete

Econometrica 1996 64(1), 1
Existence of equilibrium with incomplete markets is problematic because demand functions are typically not continuous. Discontinuities occur at prices for which a marketed asset suddenly becomes redundant. The authors show that this discontinuity disappears if they allow an agent in the economy to introduce a new asset when such redundancies occur. This enables them to prove generic existence with incomplete markets using a standard path-following argument. Moreover, the authors' approach suggests a simple algorithm for computing equilibria when markets are incomplete. They demonstrate this by computing equilibrium for a numerical example.