Unawareness and Bankruptcy: A General Equilibrium Model

We present a consistent pure-exchange general equilibrium model where agents may not be able to foresee all possible future contingencies. In this context, even with nominal assets and complete asset markets, an equilibrium may not exist without appropriate assumptions. Speci ̄c examples are provided. An existence result is proved under the main assumption that there are su±ciently many states that all the agents foresee. An intrinsic feature of the model is bankruptcy, which agents may involuntarily experience in the unforeseen states. ¤Respectively Universita di Palermo; CORE, Universite Catholique de Louvain and CentER, Tilburg University; CNRS-MAD, Universite Paris I. We thank seminar participants in various locations, and in the May 1995 CORE Conference on Incomplete Markets, Incomplete Contracts and Bounded Rationality, in particular our discussants, Jayasri Dutta and John Geanakoplos, for the comments. We also thank Eddie Dekel, Frank Hahn, Bart Lipman, Tito Pietra, Heraklis Polemarchakis, Roy Radner, Paolo Siconol ̄, for long discussions on GEI and on unawareness; and Chiaki Hara, two anonymous referees for extremely detailed comments. We are sorry if we could not pro ̄t from their advice as much as we should have: in particular the interpretation of the model we present seems still a controversial, but, at least for us, intriguing issue. The responsability for the shortcomings of the paper is all ours.