Introduction

The class of general equilibrium models of Arrow (1964), Debreu (1959), McKenzie (1959), and others is an excellent starting point for the study of actual economies. On the positive side, this class of models can be used to address the standard macroeconomic concerns of inflation, growth, and unemployment, and also more general phenomena such as the objects and institutions of trade, the absence of insurance arrangements of some kinds, or the dispersion of consumption in a population. On the normative side, this class of models can be used to study stabilization policy and optimal monetary arrangements.

Contrary views are often expressed in professional conversations and in the literature. Indeed, the Arrow-Debreu model is often said to be operational only under such unrealistic assumptions as full information, complete markets, and no diversity. Here, however, an alternative view is argued. The Arrow-Debreu model can accommodate not only diversity in preferences and endowments but also private information, indivisibilities, spatial separation, limited communication, and limited commitment. That is, standard results on the existence of Pareto optimal allocations and on the existence and optimality of competitive equilibrium allocations can be shown to apply to a large class of environments with these elements. Further, stylized but suggestive models with these elements can be constructed and made operational so that Pareto optimal and/or competitive equilibrium allocations can be characterized.