Coarse Competitive Equilibrium and Extreme Prices

We introduce a notion of coarse competitive equilibrium, to study agents’ inability to tailor their consumption to prices. Our goal is to incorporate limited cognitive ability (in particular limited attention, memory and complexity) into the analysis of competitive equilibrium. Compared to standard competitive equilibrium, our concept yields more extreme prices and, when all agents have the same endowment, riskier allocations. We provide a tractable model suitable for general equilibrium analysis as well as asset pricing. ∗Date: September 2, 2016. This research was supported by grants from the Sloan Foundation and the National Science Foundation SES-0010394 and SES-1123729 and the NSF CAREER grant SES-1255062. We thank a coeditor and three anonymous referees for very helpful comments, as well as Nicolas Butler and Kevin He for expert proofreading. The authors declare that they have no relevant or material financial interests that relate to the research described in this paper. †Princeton University. Email: [email protected] ‡Princeton University. Email: [email protected] §Harvard University. Email: tomasz [email protected]