Knowledge that Transforms

This paper defines a new concept of the core for an economy with transaction costs, and uses this concept to prove a limit theorem for sequences of replica economies. In this way it provides a rationale for a definition of equilibrium in which agents face a sequence of budget constraints. Since economies with incomplete markets are special cases of economies with transaction costs, the limit theorem also provides a rationale for Radner's equilibrium of plans, prices, and price expectations.

This paper presents a technique for demonstrating the existence of a un ique equilibrium that is applicable to a variety of models in which t he price at which goods are traded in a market is determined by pairw ise bargaining between individual buyers and sellers who are brought together by some matching process. The results are framed in terms of a new equilibrium no-tion: in a security equilibrium, no player will settle for a payoff, under any contingency, which is less than his s ecurity level given the occurrence of that contingency. The technique is applied in detail to a generalization of a model of A. Rubinstein and A. Wolinsky (1985).