"The aggregate weak axiom in a financial economy through dominant substitution effects."
John Quah
Department of Economics, Oxford University
Abstract: Consider a two period financial economy with incomplete
markets and with agents having von Neumann-Morgenstern utility functions.
It is well known that when the economy’s endowments are collinear, the
excess demand function will obey the weak axiom when certain mild restrictions
are imposed on agents’ coefficient of relative risk aversion. This result is
obtained through the application of a theorem on the law of demand (for
individual demand) formulated independently by Milleron (1974) and Mitjuschin
and Polterovich (1978). In this paper, we develop their arguments further and
apply them to economies without collinear endowments. We identify conditions
which guarantee that the economy’s excess demand function obeys the weak axiom
near an equilibrium price.