Static Equilibrium under Uncertainty and Incomplete Markets

1.1. The first model of general economic equilibrium was presented by Walras [15] more than hundred years ago. As the model became generally known, it must have been clçar that it was desirable to generalize it, and take uncertainty into account. The most visible markets at the end of the last century were probably the stock exchanges, where uncertainty obviously played an important part. Insurance was also well developed, and it was natural to assume that premiums were determined by market forces. It is possible that some economists attacked the problem, but apparently they were not successful. The literature from that period has little to say about economic risk, beyond general statements that there should be a price, so that supply of, and demand for risk-bearing services are equal.