What is the Radner Equilibrium?

The Redner equilibrium refers to an economic concept that suggests that if an economic decision maker has unlimited computational capacity she can allocate resources in an optimal manner. This economic concept (theory) was first explained by an economist by the name Roy Radner, hence the term, Radner equilibrium.

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How does the Radner Equilibrium Apply?

This theory by American economist Roy Radner omits all the uncertainty in various situations. It considers various situations where there is the following:

• The Radner Equilibrium theory involves situations with multiple assets, such as stocks, bonds and real estate properties, to name a few.
• It also considers situations with multiple states, which means it takes into account various situations or scenarios that could occur in financial markets.
• The theory also applies when dealing with multiple goods, such as consumer products, services, and natural resources.
• The Radner Equilibrium applies across different time periods, such as daily, monthly, or yearly trading, to illustrate its flexibility.

The Radner Equilibrium theory points out that in such a world, the role of money, as well as liquidity, would not be recognized. Also, information introduction like future markets and spot markets about other decision makers behavior usually introduce externalities amongst the available sets of actions. For this reason, the demand for liquidity arising from limitations of computation is generated. Generally, the concept of Radner Equilibrium takes note that the uncertainty regarding the environment has a great complication when it comes to a decision problem. This, therefore, indirectly contributes to liquidity demand.

Relationship between Radner Equilibrium and Arrow-Debreu Equilibrium

Note that the Radner Equilibrium was extended from, Arrow-Debreu equilibrium, which happens to be the base for the first consistent incomplete markets. The Arrow-Debreu framework is in the form of two-fold as highlighted below:

• The model for uncertainty in the Radner Equilibrium is represented via a tree structure. This allows for a clear view of the time passage and conflict resolution. It's essentially a tool to map out various outcomes in the future.
• The theory defines budget feasibility not by pure affordability, but rather through explicit trading of financial instruments. In layman's terms, it's about what can be afforded based on the assets at hand rather than your pocket change.

Note that these financial instruments are purposely used to permit insurance as well as inter-temporal wealth transfers across the spot markets at every trees nodes. Economic agents do face a budget sets sequence, each one of them at a date-state. Generally, just like Arrow-Debreu equilibrium, Radner equilibrium under uncertainty, makes use of consensual foresight.

• Budget Constraint
• Radner Equilibrium
• Opportunity Cost
• The 'Opportunity Set' in this context refers to the collection of feasible portfolios an investor can choose from – it sounds complex, but it's just about weighing up what financial moves are realistically available to you.
• Marginal Analysis
• Utility

• Self Interest
• Cost-Benefit Analysis
• The term 'Enlightened Self-Interest' refers to actions that simultaneously benefit oneself and others around. For instance, an investor might choose to invest in a local business, which not only offers a good return but also bolsters the local economy - a seasoned win-win approach.
• Fisher's Separation Theorem
• Ratchet Effect

• Total Utility (Economics)
• Efficiency Principle
• Expected Utility
• Subjective Theory of Value
• Positional Goods
• Utilitarianism
• Indifference Curve
• Time Preference Theory of Interest
• 'Incentives' are rewards to encourage certain behaviours – it's the financial 'carrot' that nudges investors or markets towards outcomes that create balance and efficiency within the Radner Equilibrium framework.
• 'Marginal Benefit' is the additional satisfaction or gain received from consuming an extra good or service. This concept is directly related to the Radner Equilibrium whereby investors aim to maximise their 'marginal benefits' from their portfolio of assets, everything being balanced out.

• Diminishing Marginal Utility
• Sunk Costs
• Production Possibilities Frontier
• Law of Diminishing Returns
• Economic Efficiency
• Efficiency Theory
• Productive Efficiency
• Capacity Utilization Rate
• Allocative Efficiency
• Pareto Efficient
• Comparative Advantage
• Criticisms of the Economic Approach
• Behavioral Economics
• Normative Economics
• Positive Economics
• Invisible Hand
• Sunk cost