Adv. Math. Econ. Volume 1, pp.3-15 (1999)

Heterogenous probabilities in complete asset markets

Laurent Calvet1, Jean-Michel Grandmont2 and Isabelle Lemaire3
1 Department of Economics, Harvard University, Littauer Center, Cambridge, MA02198, USA
2 CREST and CNRS, 15 boulevard Gabriel Péri, 92245 MALAKOFF Cédex, France
3 CREST-INSEE, 15 boulevard Gabriel Péri, 92245 MALAKOFF Cédex, France
We show in this paper how, in a model of assets exchange in complete competitive markets, heterogeneity of the agents' subjective probabilities generates aggregate expenditures for Arrow-Debreu securities that have the gross substitutability property, with the consequences that competitive equilibrium is unique, stable in any tatônnement process, and that the weak axiom of revealed preferences is satisfied in the aggregate. For this result, heterogeneity is required to be highest among people who have the largest risk aversion.
Key Words:
Heterogeneity, subjective probabilities, complete asset markets.