Radner Equilibrium - Definition
Written by Jason Gordon
Updated at December 19th, 2020
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Back to:ECONOMIC ANALYSIS & MONETARY POLICY
Radner Equilibrium Definition
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.
A Little More on What is the Radner Equilibrium
This theory by American economist Roy Radner omits all the uncertainty in various situations. It considers various situations where there is the following:
- Multiple assets
- Multiple states.
- Multiple goods
- Multiple time periods
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 uncertainty is explicitly modeled via a tree structure which renders time passage and uncertainty explicit resolution.
- Budget feasibility which is not defined by affordability but via financial instruments explicit trading.
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.