Nash–Walras equilibria - Polemarchakis.pdfVIP

Research in Economics (1997) 51, 31–40 Nash–Walras equilibria S. GHOSAL Department of Economics, Queen Mary and Westfield College, University of London, London, U.K. H. M. POLEMARCHAKIS CORE, Universite Catholique de Louvain, 34 Voie du Roman ´ Pays, B-1348, Louvain-la-Neuve, Belgium Summary At a Nash–Walras equilibrium, individuals exchange commodities com- petitively, and, simultaneously, they interact strategically. Under stand- ard assumptions, Nash–Walras equilibria exist; equilibrium profiles of actions are, typically, determinate but pareto suboptimal, though not constrained pareto suboptimal: a transfer of revenue need not suffice for a pareto improvement in welfare. 1997 Academic Press Limited J.E.L. Classification: D70, D72, D50, D60. Keywords: Nash, Walras, equilibrium, determinacy, optimality. 1. Introduction Even in advanced market economies, the welfare of individuals, the allocation of resources more narrowly, are not determined exclusively by the market mechanism. Externalities and public goods are well-known instances of market failure. When the market for the transfer of purchasing power across time and contingencies is incomplete, there is scope for contracts that offer additional opportunities. Personal and social relations and interactions, though hardly insignificant for the welfare of individuals and the allocation of resources, are largely beyond the scope of the market. In economies at earlier stages of development, the limited role of the market is evident. Within a competitive market, individuals take only implicit account of the choices of other individuals and interact through the intermediation of the price mechanism. When the intermediation of the price mechanism is not operative, outside the market, in- dividuals take explicit account of the choi