Coarse Competitive Equilibrium and Extreme Prices


Gul, Faruk, Wolfgang Pesendorfer, and Tomasz Strzalecki. 2017. “Coarse Competitive Equilibrium and Extreme Prices.” American Economic Review 107: 109-137.
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We introduce a notion of coarse competitive equilibrium (CCE), to study agents' inability to tailor their consumption to the state of the economy. Our notion is motivated by limited cognitive ability (in particular attention, memory, and complexity) and it maintains the complete market structure of competitive equilibrium. Compared to standard competitive equilibrium, our concept yields riskier allocations and more extreme prices. We provide a tractable model that is suitable for general equilibrium analysis as well as asset pricing.

Last updated on 01/04/2017