General equilibrium with heterogeneous participants and continuous consumption with information costs and short selling constraints

Abstract

The paper studies the term structure of interest rates imposed by equilibrium in a production economy consisting of participants with heterogeneous preferences with information costs and short selling constraints. Our model accounts explicitly and simultaneously for information costs and short sales in the pricing of assets in the economy. Consumption is continuous. The paper contains an exact solution to market equilibrium. It provides an explicit constructive solution for determining the state-price density process. Interest rates and their behaviors are a function of economic variables with information costs and short selling constraints.