Decentralizability of efficient allocations with heterogeneous forecasts

Abstract

Do price forecasts of rational economic agents need to coincide in intertemporal 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. With time-separable utilities, we show that there is a one dimensional set of ETE allocations for generic endowments. Moreover, these efficient allocations can be supported by forecasts that disagree up to one degree of freedom. Thus, strong as efficiency and perfect competition may appear, they do not imply perfect foresight, but they do add explanatory power to temporary equilibrium, since they select a small subset out of the Pareto efficient allocations, which generally have higher dimension.