Dynamic Aggregation and Computation of Equilibria in Finite-Dimensional Economies with Incomplete Financial Markets

Domenico Cuoco

This paper constructs a representative agent supporting the equilibrium allocation in ``event-tree'' economies with time-additive preferences and possibly incomplete securities markets. If the equilibrium allocation is Pareto optimal, this construction gives the usual linear welfare function. Otherwise, the representative agent's utility function is state-dependent,
even when individual agents have state-independent utilities and homogeneous beliefs. The existence of a representative agent allows us to provide a characterization of equilibria which does not rely on the derivation of the agents' intertemporal demand functions for consumption and investment and transforms the dynamic general equilibrium problem into a static one. This characterization is therefore especially well suited for numerical computation of equilibria in economies with incomplete financial markets.