Arrow-Debreu Equilibria for Rank-Dependent Utilities
31 Pages Posted: 10 Jun 2016
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Arrow-Debreu Equilibria for Rank-Dependent Utilities
Date Written: July 2016
Abstract
We provide conditions on a one‐period‐two‐date pure exchange economy with rank-dependent utility agents under which Arrow-Debreu equilibria exist. When such an equilibrium exists, we show that the state‐price density is a weighted marginal rate of intertemporal substitution of a representative agent, where the weight depends on the differential of the probability weighting function. Based on the result, we find that asset prices depend upon agents' subjective beliefs regarding overall consumption growth, and we offer a direction for possible resolution of the equity premium puzzle.
Keywords: rank‐dependent utility, probability weighting, Arrow‐Debreu equilibrium, state‐price density
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Arrow-Debreu Equilibria for Rank-Dependent Utilities
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