Competitive Equilibrium with Restricted Participation: The Case of Circular Trade

Abstract

In a model of competitive equilibrium with restricted participation, we prove the existence of a circular competitive equilibrium (CCE). There is a unique CCE if all coefficients of relative risk aversion are bounded above by 1. The direction of trade is determined by the product of the marginal rates of substitution calculated at initial endowments. We also propose a measure for the trade volume (for each individual and for the entire market), prove a no-trade result, and calculate wealth and belief effects on the circular trade economy. Show more