Contracting over Prices

• Main Authors: CHATTERJI, Shurojit, GHOSAL, Sayantan
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2012
• Subjects: equilibrium; future prices; uncertainty; contracts; Economic Theory; Finance
• Online Access: https://ink.library.smu.edu.sg/soe_research/1417; https://ink.library.smu.edu.sg/context/soe_research/article/2416/viewcontent/36_2012_ContractingoverPrices.pdf
• Institution: Singapore Management University

We define a solution concept, perfectly contracted equilibrium, for an intertemporal exchange economy where agents are simultaneously price takers in spot commodity markets while engaging inefficient, non-Walrasian contracting over future prices. Without requiring that agents have perfect foresight, we show that perfectly contracted equilibrium outcomes are a subset of Pareto optimal allocations. It is a robust possibility for perfectly contracted equilibrium outcomes to differ from Arrow-Debreu equilibrium outcomes. We show that both centralized banking and retrading with bilateral contracting can lead to perfectly contracted equilibria.