Decentralizability of Efficient Allocations with Heterogenous Forecasts
Do price forecasts of rational economic agents need to coincide in perfectly competitive complete markets in order for markets to allocate resources efficiently? To address this question, we define an efficient temporary equilibrium (ETE) within the framework of a two period economy. Although an ETE allocation is intertemporally efficient and is obtained by perfect competition, it can arise without the agents forecasts being coordinated on a perfect foresight price. We show that there is a one dimensional set of such Pareto efficient allocations for generic endowments.
Intertemporal trade in complete markets is known to achieve Pareto efficiency when the price forecasts of agents coincide and are correct. The usual justification for this coincidence of price forecasts is that if agents understand the market environment perfectly, they ought to reach the same conclusions, and hence in particular, their price forecasts must coincide. But it is against the spirit of perfect competition to require that agents should understand the market environment beyond the market prices they commonly observe; we therefore study intertemporal trade without requiring that price forecasts of heterogenous agents coincide.