Approximate Solutions of the Walrasian Equilibrium Inequalities with Bounded Marginal Utilities of Income

13 Pages Posted: 15 Aug 2014 Last revised: 29 Aug 2014

See all articles by Donald Brown

Donald Brown

Yale University - Cowles Foundation

Date Written: August 28, 2014

Abstract

Recently Cherchye et al. (2011) reformulated the Walrasian equilibrium inequalities, introduced by Brown and Matzkin (1996), as an integer programming problem and proved that solving the Walrasian equilibrium inequalities is NP-hard. Brown and Shannon (2002) derived an equivalent system of equilibrium inequalities, i.e., the dual Walrasian equilibrium inequalities. That is, the Walrasian equilibrium inequalities are solvable iff the dual Walrasian equilibrium inequalities are solvable.

We show that solving the dual Walrasian equilibrium inequalities is equivalent to solving a NP-hard minimization problem. Approximation theorems are polynomial time algorithms for computing approximate solutions of NP-hard minimization problems. The primary contribution of this paper is an approximation theorem for the equivalent NP-hard minimization problem. In this theorem, we derive explicit bounds, where the degree of approximation is determined by observable market data.

Keywords: Rationalizable Walrasian markets, NP-hard minimization problems, Approximation theorems

JEL Classification: B41, C68, D46

Suggested Citation

Brown, Donald J., Approximate Solutions of the Walrasian Equilibrium Inequalities with Bounded Marginal Utilities of Income (August 28, 2014). Cowles Foundation Discussion Paper No. 1955, Available at SSRN: https://ssrn.com/abstract=2480393 or http://dx.doi.org/10.2139/ssrn.2480393

Donald J. Brown (Contact Author)

Yale University - Cowles Foundation ( email )

Box 208281
New Haven, CT 06520-8281
United States

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