Nonexistence of Constrained Efficient Equilibria when Markets are Incomplete

We consider economies with incomplete markets, production, and a given distribution of initial endowments. The main purpose of the paper is to present a robust example of an economy with only one firm and one good per state in which no production decision entails a constrained efficient outcome. In particular, the unique Drèze equilibrium is dominated by every other production decision. ∗We are grateful to Jacques Drèze for valuable comments and helpful discussions. We benefited from discussions with H. Polemarchakis. E. and H. Dierker would like to thank the Centre of Industrial Economics and the Institute of Economics, University of Copenhagen, for their hospitality. Financial support from both institutions is gratefully acknowledged. †Institut für Wirtschaftswissenschaften, Universität Wien, Hohenstaufengasse 9, A-1010 Wien, Austria ‡Centre of Industrial Economics and Økonomisk Institut, Københavns Universitet, Studiestræde 6, DK-1455 København, Denmark