History as a Widespread Externality in Some Arrow-Debreu Market Games

Two Arrow–Debreu market games are formulated whose straightforward Nash equilibria are Walrasian. Both have an auctioneer setting prices to maximize net sales value. In the second an additional redistributive agency maximizes welfare through optimal lump-sum transfers. In intertemporal economies, however, subgame imperfections can arise because agents understand how current decisions such as those determining investment influence either future prices (with finitely many agents), or future redistribution (even in continuum economies). The latter observation undermines the second efficiency theorem of welfare economics. Indeed, when the state of the economy affects future policy, it functions like a “widespread externality.” History as a Widespread Externality