EQUILIBRIUM IN INCOMPLETE MARKETS: I A Basic Model of Generic Existence

This paper demonstrates the generic existence of general equilibria in incomplete markets. Our economy is a model of two periods, with uncertainty over the state of nature to be revealed in the second period. Securities are claims to commodity bundles in the second period that are contingent on the state of nature, and are insufficient in number to span all state contingent claims to value, regardless of the announced spot commodity prices. Under smooth preference assumptions, equilibria exist except for an exceptional set of endowments and securities, a closed set of measure zero. The paper includes partial results for fixed securities, showing the existence of equilibria except for an exceptional set of endowments.