Equilibrium Prices When the Sunspot Variable Is Continuous

We analyze sunspot-equilibrium prices in nonconvex economies with perfect markets and a continuous sunspot variable. Our primary result is that every sunspot equilibrium allocation can be supported by prices that, when adjusted for probabilities, are constant across states. This result extends to the case of a finite number of equally probable states under weak nonsatiation conditions, but does not extend to general discrete state spaces. We use our primary result to establish the equivalence of the set of sunspot equilibrium allocations based on a continuous sunspot variable and the set of lottery equilibrium allocations * We thank Ted Bergstrom, David Easley, John M. Marshall, the associate editor, and seminar participants at Cornell, UCSB, the 1997 Workshop in General Equilibrium Theory in Venice, Italy, and the 1998 Cornell-Penn State Macroeconomics Workshop for valuable comments. We gratefully acknowledge the support of the Center for Analytic Economics and the Thorne Fund. Garratt and Qin thank the Academic Senate at UCSB and Keister thanks the Alfred P. Sloan Foundation for financial support. a Department of Economics, University of California, Santa Barbara, CA 93106-9210 USA. Email: [email protected] and [email protected] b Centro de Investigación Económica, ITAM, Av. Camino Santa Teresa #930, México, D.F. 10700 Mexico. E-mail: [email protected] c Department of Economics, Cornell University, 402 Uris Hall, Ithaca, NY 14853-7601 USA. Email: [email protected].