Document Type

Discussion Paper

Publication Date

1-1-1989

CFDP Number

895

CFDP Pages

16

Abstract

There are two sources of inefficiency of strategic equilibria (SE) in market mechanisms. The first is the oligopolistic effect, which occurs when an agent can single-handedly influence prices. With a continuum of agents we get “perfect competition” and this effect is, of course, wiped out. But the inefficiency of SE’s may nevertheless persist because agents are not “perfectly liquid,” i.e., the constraints of the mechanism are such that they cannot carry out arbitrary trades at the market prices. Our main result is that, if enough repeated rounds of trade are permitted within a single utility period, then the liquidity problem is overcome: SE outcomes turn out to be not only efficient but, in fact, Walrasian.

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