American Economic Review Vol. 107 No. 1 2017

Coarse Competitive Equilibrium and Extreme Prices

Faruk Gul¹; Wolfgang Pesendorfer¹; Tomasz Strzalecki²

¹ Department of Economics, Princeton University, Princeton, NJ 08544 (e-mail: ) · ² Department of Economics, Harvard University, Cambridge, MA 02138 (e-mail: )

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.

DOI

10.1257/aer.20141287

Volume

107

Issue

1

Pages

109-137

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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