COMPETITIVE EQUILIBRIUM UNDER UNCERTAINTY11This research was supported in part by the Office of Naval Research under Contract ONR 222(77) with the University of California. Reproduction in whole or in part is permitted for any purpose of the United States Government.

This paper extends the general equilibrium analysis of the previous reading by examining the states of nature that particular individuals are capable of distinguishing. Equilibrium is examined under the condition that individuals engage in no trades that would involve delivery or receipt of goods based on distinctions that the individual is unable to make. The alternative extreme would permit two persons to trade provided one of them is able to distinguish states of nature. This would entail a great degree of trust and would ignore the communication costs when one party has to inform the other that his actions are now expected. In practice some institutions do rely on trust (together with some policing of honesty). One thinks of public accountants scrutinizing the records of corporations as a check that the managers do provide to owners the correct portion of profits. Many circumstances involve agency relations where an individual hires another to make decisions for him. These too rely on trust, which is not included in the model. Thus the model represents one extreme of possible extensions of the model from Chapter 11.